Real estate is now, and always will be, an ever-changing industry. Realtors have so much to juggle on a daily basis, that it is useful to have a lending expert on-hand to ask important questions that will help get deals done. For our lending update, we decided to again hand the keyboard over to Chicago Agent readers. In our cover story, nine different agents posed a question to their favorite mortgage professional, and the answers can be found below. From short sales to renovations, here are the questions our readers wanted answered.
Q: Jim Gramata, Senior Sales Consultant, Gramata Realty Group, @Properties, Bucktown, 773.315.6103, [email protected]
I have potential buyers asking how important their credit/FICO score is in getting a mortgage to purchase a new home. How do their scores impact their rates?
A: TJ Flodin, Branch Manager, Draper and Kramer 1st Advantage Mortgage, Chicago, 312.735.3419, [email protected]
Your FICO score has never been more important than it is now in the mortgage process. To briefly review, for conforming loans:
740 and above gives you the best rates lenders have, with access to all programs;
720-739 will cost you .25 percent of the loan amount vs. 740 and above;
700-719 will cost you .75 percent of the loan amount vs. 740 and above;
680-699 will cost you 1.5 percent of the loan amount vs. 740 and above.
Remember that these ranges differ for Jumbo (by lender) and FHA.
There are many different factors that go into making up a credit score, and I like to consider all components and break down exactly what will most impact a FICO score.
Payment history makes up about 35 percent of a person’s credit score and how a borrower has paid credit cards, installment loans and mortgage payments factor in. The amount you owe makes up about 30 percent of your credit score. It takes into account the number and type of accounts you have as well as the ratio of balance to total credit limit. Of course the lower your balance is the better off you are. It is better to have $1,000 balances on five cards than a $5,000 balance on one card.
The length of your credit history compromises roughly another 15 percent. This includes the time period since you’ve opened different types of accounts. Remember it is good to keep the old accounts open even if you do not use them, as closing them can negatively impact your score.
Making up another 10 percent of your FICO score is the type of credit you have (installment, revolving, consumer finance or mortgage credit). You can benefit from having a history of managing different kinds of credit responsibly.
The last 10 percent of your score is based on how many accounts that you have been opened in the last 12 months and the number of inquiries on each account.
There are things you can do to improve your FICO score — most importantly, pay off your bills on time. Delinquent payments, even if only a few days late, can have a major negative impact on your FICO score. If you have missed payments, get current and stay current. The longer you pay your bills on time after being late the more your score will improve.
Also, apply for and open new credit accounts only as needed and not every time a store offers you 20 percent off your purchase. It probably won’t raise your FICO score and it may even lower it. Also, keep balances low on credit cards. High outstanding credit card debt can negatively impact your FICO score. Pay off debt rather than move it around from one credit card to another. Raising your limit on credit cards can help as well.
If you have had credit problems in the past, the best thing to do is get yourself on the right path as quickly as possible. Re-establish your credit history by paying your bills on time. Don’t close unused credit cards as a short-term strategy to raise your FICO score. This approach could backfire and actually lower your FICO score.
Everyone’s credit is different and there have been countless analyses about dissecting credit reports and improving credit. If you would like an analysis of your credit, please feel free to contact me or have a client contact me.
Q: Peter Fotopolous, Realtor, Dream Town Realty, Chicago, 312.698.8512, [email protected]
What does a lender mean necessarily in regards to whether or not a condo project is warrantable on a Fannie Mae/Freddie Mac loan?
A: Tony Ranft, Mortgage Consultant, A & N Mortgage Services Inc., Chicago, 773.305.7032, [email protected]
Warrantability means the collateral is acceptable to the lender. A good majority of today’s residential mortgages are securitized by Fannie Mae, Freddie Mac and Ginnie Mae. Ginnie Mae oversees the FHA and VA, and with that comes its own condo approval process. A lot of the criteria mirrors what you will find with Fannie Mae and Freddie Mac. But lenders delivering to Fannie Mae and Freddie Mac generally have their own overlays (additional guidelines), which is what makes it confusing for many borrowers and Realtors.
What should be particularly noted are the following: percentage of primary and secondary residences versus the percentage of investment properties with the condo project, percentage of residential space versus commercial space with a project, the presence of a special assessment or pending litigation and the amount of the association’s annual budget earmarked for reserves.
Other variables play a factor, as well, and my advice is for every buyer’s agent to accompany the buyer’s pre-approval with the condo questionnaire from the buyer’s lender. Every listing agent upon receiving a listing for a condo should present the homeowner’s association with a condo questionnaire from their preferred lender in order to quickly determine any issues the project might have in today’s lending environment.
Q: Karen Breen Elia, RE/MAX Exclusive Properties, Chicago, 773.230.4294, [email protected]
So how can my lender help me generate more business?
A: David Kasprisin, Home Loan Manager, Bank of America, 312.596.0397, [email protected]
There are several ways. First, speak to them about getting added to their company’s preferred REO broker network so you will have the ability to try to capture REO business. Second, you can leverage your relationship with a lender to partner with their existing past customer database or if they work for a bank, try to get some business from one of their banking centers.
Finally, Bank of America is working with an exclusive business development and lead management system that allows real estate agents to easily manage a large pipeline of homebuyers. It’s an efficient and effective way to become the go-to source for homebuyers who are “just looking” or are ready to find and finance a new home. You want to enlist your lender to become part of your support team, making the opportunities to increase business limitless.
Q: Evelyn Fred, Agent, Baird & Warner, Chicago, 773.697.5594, [email protected]
What products are currently available for buyers purchasing multi-unit properties — either owner occupied or investment — and can we use the income stream from those units to qualify them?
A: Corey Souliotis, Senior Mortgage Consultant, Mortgage Services III, LLC (MSI), 815.690.6390, [email protected]
To answer the first part of your question in regards to current products that are available, there are still conforming and FHA products obtainable for buyers. For owner-occupied buyers, they can utilize a conforming product and in today’s market the lender will typically require 20 percent down on two units and 25 percent on three to four units (this may vary between lenders). They can also use an FHA product which will only require 3.5 percent down on two to four units.
The loan officer should sit with the buyer and analyze both options and see which product best fits their needs and goals. For investors, they can also take advantage of conforming products, and lenders will typically require 25 percent down on two to four units (may vary between lenders).
As for the second part of your question, this is truly a case by case basis when we run the file through either Desktop Underwriter (DU) or Loan Prospector (LP) for an underwriting decision. The underwriting system will pull together the entire file with all of its compensating factors to determine what documentation is required.
CAUTION: DU and LP will normally require rental property management experience for a minimum of two or more years and rent loss insurance for purchase, construction and limited cash-out refinance transactions with an LTV greater than 75 percent, and for cash-out refinances with an LTV greater than 70 percent. If this requirement is not met, the borrower must qualify for the PITI payment using their documented and other acceptable sources of income. But once again, this is a case by case situation.
Q: Randy Nasatir, Prudential Rubloff, Chicago, 773.851.5117, [email protected]
Is it possible to fight an appraisal if it comes in under the contract price? It is very clear these days that the appraisers are afraid to start raising the prices and a fire sale nearby or an appraiser not knowing the different values in the city, block by block, can significantly alter the outcome.
A: Philip Brilliant, President/CEO and Founder, Chicago Financial Services, Inc., Chicago, 312.327.9979, [email protected]
It is possible to contest an appraisal under the new Home Valuation Code of Conduct (HVAC), but only from an entity or individual whose compensation is not affected by the outcome. Although the Realtor is encouraged to meet with the appraiser and provide relevant market data regarding a specific assignment at the time of inspection, he or she cannot directly argue with the appraiser if the report comes in lower than the contract price. But, if the Realtor has valid market information that might add value to the report, it can be forwarded to the lender who can then submit it to the appraiser for review. Only a non-commissioned employee whose earnings are not affected by the outcome is permitted to contact the appraiser to request a re-consideration.
Additionally, if a resolution cannot be obtained that satisfies the buyer, Realtor or mortgage broker, another appraisal can be ordered and used.
Q: Lately I have clients who have had to rent out their condos as the market won’t dictate a sale. Most will have to rent the property for several years. I’ve suggested refinancing to them to try and get the costs down. Is it advantageous to do so if the property will most likely sell in the next two years?
A: Yes, if you can effectively lower your carrying costs, it is usually worthwhile refinancing to a lower rate. The equation is always: cost/savings = months to “pay back”. We routinely offer zero closing cost refinances to our clients where the break even period is at day one. Transactions that are not owner-occupied are priced higher by FNMA and FHLMC, so depending on the loan size, there may not always be a zero cost option. That is when you would need to estimate your holding period versus the number of months to pay back the cost of the transaction and then proceed from there.
Q: Reid Anderson, Sales Agent, Blue Fence Real Estate, Lake Zurich, 847.840.7961, [email protected]
Have you seen a decrease in homebuyers since the end of the tax credit?
A: Craig Hodges Sr., Senior Mortgage Loan Officer, Fifth Third Bank, Cary, 815.543.6272, [email protected]
Not at all. In fact our numbers have increased. Consumers are finally realizing that homes can be purchased at incredible prices and with historically low interest rates. Many of our buyers have stated they chose to buy now because they didn’t want to miss this great opportunity.
Q: What is the major issue with short sales?
A: The major issue with short sales is the length of time it takes for a response from the seller’s lender(s) to approve the short sale. Buyers are having a difficult time submitting an offer and waiting several months for a first response. A little known fact is the lender doesn’t make the final decision if the short sale is approved. Although the lender communicates with the homeowner regarding the terms of the short sale, they also have to communicate with the investor, who makes the final decision. The short sales can become complex and troublesome especially whenever there are two loans (first and second lien) in the picture, because parties need authorization of the second lien holder to release the lien. If the second lien holder rejects the release, then the short sale will be denied and the property ends up in foreclosure with the first lien holder keeping the property.
Q: What do you expect to see in the real estate market next year?
A: I really think we are about to see the market take off. Total units sold from 2009 to 2010 in most of the Chicagoland area have increased by 5 to 10 percent and will continue in 2011. Interest rates will remain low, home prices are staying steady and the economy is starting to rebound. The fear is starting to drift away and people will want to take advantage of what we will look back at as one of the best times in history to purchase a home.
Q: We have heard the process is complex and frustrating to apply for a renovation loan?
A: That’s not completely untrue, however, the success of your renovation application depends on two main factors. Most importantly, select the right lender and knowledgeable loan officer experienced with the process. Secondly and equally as important, choose the right contractor for your renovation loan.
Q: Martin Walsh, @properties – North Shore, 847.840.4663, [email protected]
Short sales are more prevalent in the marketplace now. What additional steps does a lender have to take in order to close a buyer that is purchasing a home that is in short sale?
A: Jo Ann Theriault-Fazio, Vice President of Mortgage Lending/Branch Manager, Guaranteed Rate, Inc. Northbrook Branch, 847.972.5704, [email protected]
With short sales, extra steps are put into place to verify that fraud is not being committed by any of the parties involved in the transaction. For example, an offer cannot be pre-arranged prior to the home being listed for short sale. This is verified by reviewing the contract date and listing history.
Q: What are some of the potential additional costs that are passed on to a buyer in a short sale transaction?
A: In the state of Illinois, the Owners Title Insurance is typically the responsibility of the seller. On short sales, it is common for the bank to pass this fee on to the buyer, which can amount to several thousand dollars. Other fees that are typically the responsibility of the seller — such as transfer stamps for the state, county and city — are also being passed along to the buyer. They agree on a net amount for the short sale, and in turn fees get passed off to different parties.
Q: It is definitely important for a seller to use a Realtor that is experienced with short sales, but do you also think that it is important for a buyer to use an agent that has that same level of expertise?
A: Definitely. So much has changed in the real estate and lending industries that half of what we do upfront with a client is all about setting the right expectations. If a buyer is utilizing an agent that has experience with short sales, whether it is on the buy or sale side, that agent will be able to assist in setting expectations on the negotiating process, time frame and the potential additional costs that go into a short sale. Short sales are more commonplace right now and so many different people are part of each transaction. If expectations are given to the client upfront, it will make it a lot easier for the lender to make the transaction go as smoothly as possible and meet the closing deadline.
Q: Emily Jeffries, RE/MAX Exclusive Properties, Chicago, 773.327.2114, [email protected]
Buyers often ask me if there are any rehab loans available for properties including foreclosures and short sales. What should I tell them?
A: Betsy Lidecker, Vice President Residential Lending, Blueleaf Lending,Chicago, 312.379.8857, [email protected]
Yes, FHA has a 203K Streamline program which can be used to purchase a home and finance construction costs up to $35,000. The scope of work that is allowed is specific and the guidelines must be adhered to strictly. The advantages are that qualification may be more flexible since it is an FHA program. The disadvantages are that homebuyers often have to wait 30 to 45 days after closing before the rehab funds are available, plus once the contractor plans have been approved, they cannot be changed. Also, the rehab funds are capped at $35,000 and may be used for owner-occupied property only. Properties that are eligible for this program are single-family homes, condominiums, townhouses, mixed-use storefront and on one- to four-unit buildings. Examples of some of the improvements allowed include, but are not limited to, repair/replacement of roofs, gutters and downspouts; repair/replacement/upgrade of existing HVAC systems; repair/replacement/upgrade of plumbing and electrical systems; repair/replacement of flooring; and minor remodeling, such as kitchens, which does not involve structural repairs.
For situations that do not meet the 203K Streamline guidelines due to loan limits, type of rehab or those projects that need more than $35,000 worth of improvements, Blueleaf Lending, a subsidiary of Midwest Community Bank, offers a construction /rehab program. This program can be used in a variety of scenarios, including short sales and foreclosures, as either primary residences or investment properties. Advantages of the Blueleaf Lending rehab program are that there are no restrictions on the amount of rehab loan or on type of renovation work, meaning that structural work is allowed. Also, the in-house program provides project management, including review of contractor estimates along with an ability to modify plans during construction, offers unlimited draws and is set up for quick decisions and quick loan closings. While buyers need to show reserves to be eligible for this program, in the end they may only be putting up 5 percent of the total project cost.
For the savvy buyer, today’s market offers an impressive opportunity to build equity quickly by taking advantage of current real estate prices combined with the flexible rehab programs that are available.
Q: Emily Santos Broker-Senior Real Estate Consultant, @properties, River North, 312.334.8374, [email protected]
My prospective buyer keeps finding properties with conditions that keep them from obtaining financing, such as a missing furnace or flooring. What tools do you have that will allow them to purchase a property in need of minor repairs without having to obtain a rehab loan?
A: Dave Jones, Business Development Manager, Envoy Mortgage, Palos Heights, 708.415.0258, [email protected]
Envoy Mortgage has just the tool to help in these instances. Generally, improvements for subject properties must be complete prior to funding a mortgage loan. However, delays due to weather or contractor or instances where the subject property may have physical deficiencies or deferred maintenance may be considered minor in nature and warrant repairs.
Apart from the standard FHA Streamline 203k loan, Envoy Mortgage offers an Escrow Hold-back program. The purchaser is able to obtain conventional or FHA financing on a property in need of minor repairs that would otherwise prohibit financing. Eligible properties include primary residence SFR, PUD, townhomes and condominiums. Examples of eligible repairs/ improvements include landscape, driveways, walkways, flooring or painting. Repairs or improvements are not limited to those stated; however, they must be considered minor in nature with the ability to complete within 15 days.
The borrower is not allowed to finance the repair but is allowed to establish an escrow account funded by borrower, seller or split between the two. The maximum amount for escrows is the lesser of 2 percent of the property’s appraised value or sales price. Any overage of funds will be disbursed to the appropriate party once all work and inspections are complete. C.A.