Your Chicago Mortgage Guy

Commercial Space In Your Condo Building – How Much Is Too Much?

There has recently been a lot of talk about the health of individual Condo Associations and Projects, and what constitutes a safe Condominium investment. The Chicago Tribune ran a terrific article a couple of weeks ago about this very topic, and frankly, scared the bejeezus out of a lot of potential buyers and realtors. You can see the article in its original form here. Chicago Tribune - Condo Deals Die Article

This article touches on a number of things, which we are going to cover here over the next week or two, but something I have been running into a lot lately is the way Fannie and Freddie are now viewing Commercial Space in Condo Buildings. If you live in a major city, this could very well affect you.

Fannie Mae, Freddie Mac and FHA have long had guidelines in place that state that a Condominium Project cannot contain more than 20% Commercial Space. So, what constitutes 20% commercial space? Technically it is supposed to be square footage. When a developer has the Declarations written for a building, there is a survey done of the building itself and the square footage that belongs to each individual unit. This is used to determine the amount that each unit pays into the HOA for dues.

Now, picture any four unit condo building on a commercial thoroughfare in Chicago. While it might seem obvious from the street that each unit takes up the same amount of space, and that 100% divided by 4 is 25% each, that isn't usually the case. In most cases, the survey will include parking that may only belong to the residential units, or common space like a roof deck, or a deck above a garage, that only belong to the residential units, that push the percentage of ownership of the commercial space under 20%, thus conforming to Fannie/Freddie/FHA condo guidelines.

When the commercial space still doesn't conform to this 20% threshold, it has long been commonplace to separate the commercial units from the residential Home Owners Association. Until recently if the commercial spaces didn't appear in the declarations and didn't contribute to the HOA, they were not considered part of the residential project and were excluded completely. Recently, Fannie Mae, Freddie Mac and FHA have clarified this issue and this no longer holds true. If you have commercial space in a condominium project, regardless of whether they are part of the residential condo association, that square footage is now factored into the condo approval.

This is not a big deal in our first example, but a very big deal for many existing condo projects. For instance, if you have a 3 unit condominium building on a commercial thoroughfare, you are virtually out of options for financing. Another example would be some older condo conversions with multiple commercial and even multiple levels of commercial space, and no clear declarations stating percentage of ownership, because maybe these units were never part of the association.

So, what are your options then? They aren't good. If you fall between 20%-25%, and the rest of the association is in good shape and you have a strong file in terms of the borrower, there is a good chance you can get an exception through Fannie/Freddie. You can also generally find a portfolio lender that will overlook the percentage of ownership, but at a higher down payment. If you are between 25%-30%, you can apply for an exception, but the higher the percentage of commercial, the less likely you get it approved.

If you are in a property where the percentage of commercial is over 20%, you may want to look at the original survey and see if it is truly reflective of where your current project is. For instance, if a roof deck was added, or common space was added over a garage, they property now has more residential square footage, and the Declarations could potentially be changed. The original survey may also have been done incorrectly and the commercial space, when including common elements belonging to the residential units, may just be incorrect.

If you are in one of these larger buildings where the square footage isn't clear at all, it's best to be prepared when you go into this either with documentation showing the calculated square footage. At the end of the day, it's a judgment call by the appraiser as to exactly what percentage is residential verses commercial, and even they aren't always sure. A single appraiser doesn't always even have the type of access that would be necessary to walk off an entire properties square footage, much less the time or patience to do so in the first place. Remember, these guys are only making a couple hundred bucks to be out there for a very short period of time.

If you have any questions, feel free to reach out to Your Chicago Mortgage Guy!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

Private Mortgage Insurance

Most people just think of mortgage insurance as that expensive line item on their mortgage statement, that doesn't seem to do anything for them.  What's forgotten is that without the mortgage insurance, you could never get into the loan without a 20% down payment in the first place.  Lenders take a lot of risk when they take a lien on property, with an equity position over 80%.  As we have seen in the last couple of years, when real estate prices fall, the lender is left holding on to property, without any equity position at all. 

Something that is lost on borrowers though is that Mortgage Insurance is a product.  And, not just one product, but multiple insurance products.  There are different pricing structures for different insurers, different insurance products and they change depending on the assessed risk of the mortgage being insured.  We are going to cover the three main products available to borrowers these days. 

Borrower Paid Mortgage Insurance (BPMI)

This is the most common type of mortgage insurance, and the easiest to explain and sell to the consumer.  Borrower Paid Mortgage Insurance is paid monthly by the borrower.  The amount of insurance is determined by the Loan To Value of the home, FICO score and Loan Type.  Here is an example of how mortgage insurance gets more expensive as the loan to value, and the perceived risk increase.

Download Borrower Paid Mortgage Insurance

If you look closely, you will see that as the Loan To Value goes from 85% to 97%, the rate of mortgage insurance increases.  At 97%, the Interest Rate also increases, but we'll cover that another time. 

While insurance rates don't vary much from insurer to insurer, guidelines can vary wildly.  Each individual insurer has it's own risk tolerances.  They may be different from one another in the maximum Debt To Income that they will limit a borrower too, or they may have different guidelines when it comes to Condominiums or Declining Markets.  The important thing for a lender is to have as many Insurance partners as possible.  That way if one insurer won't insure a file, there may be a second, third or even fourth option.

The benefits to a borrower for this type of Mortgage Insurance are that it is the easiest to obtain, and it goes away eventually.  When the loan to value reaches 78% of the original purchase price, or the appraised value at the time of refinance, the mortgage insurance automatically drops off.  This is the best option if you are in the loan for the long term.  Also, you can get a cheaper rate if you have a loan amortized for 25 years or less.  This is a great trick if you can afford a 25 year, 20 year or 15 year fixed mortgage.  By just lopping off 5 years on the amortization, you can knock of hundreds of dollars a year in insurance payments.  That's something to ask your loan officer about.

Lender Paid Mortgage Insurance

This product crept into the market place about 5 or 6 years ago.  The idea is that the lender pays for the Mortgage Insurance Certificate at closing, and the insurance is paid by raising the interest rate, thus raising the premium paid to the lender.  The lender then takes that increased premium and pays for the Insurance Certificate.  So essentially, your Mortgage Insurance is now built into your interest rate.  Take a look at the following graph to get an understanding of how your interest rate increases as the Loan To Value increases.

Download Lender Paid Mortgage Insurance\

The first thing you might notice is that even though the interest rate is higher, the monthly payment is lower than our scenario's with Borrower Paid Mortgage Insurance.  With the insurance built into the rate, the monthly payment is lower, but only in the short term.  The downside here is that the insurance never goes away.  Not at 20%, not ever.  So, if you are interested in this type of mortgage insurance, it's perfect if you are going to be in your property for ten years or less.  The other advantage to this type of mortgage insurance is that because it is essentially built into your interest rate, it is then tax deductible.  By increasing the amount of interest you pay over the course of the year, you increase the amount of interest you get to write off against your income at the end of the year. 

Single Premium Mortgage Insurance

I love this program, and I don't think a lot of people even know it's out there.  As a borrower, you always have the option to pay your mortgage insurance premium, outright, at the closing.  This eliminates ever paying any mortgage insurance during the life of the loan.  The downside, is it's expensive.  See the attached spreadsheet.

Download Single Premium Mortgage Insurance

This is a great option if you go into a purchase transaction asking for a large closing cost credit.  It allows you to have the seller pay your mortgage insurance for you for the life of the loan.  If the borrower is paying it on there own, you really have to look at the transaction as a whole.  Would that premium be better served going towards down payment?  Depends on the borrower and the transaction.

Here is a final spreadsheet with all three comparisons side by side.

Download Mortgage Insurance Comparison

Remember, any good Loan Officer is going to have all of these options available and you should at least know if there is a better option out there for you.

Next we talk about Loan Level Pricing Adjustments and how Fannie and Freddie decided to stick it to everyone.  Fun stuff!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

Conventional Financing - Fannie Mae and Freddie Mac

When you hear us talk about 'conventional' financing, what we are referring to is mortgages backed and underwritten to Fannie Mae and Freddie Mac guidelines.  It's as simple as that these days.  There just aren't any other conventional financing options anymore.  Whether you walk into a Bank of America branch and get conventional financing, or through a Broker, we are all pretty much looking at the same underwriting guidelines and programs. 

The basic Fannie Mae and Freddie Mac program guidelines are the same for every institution.  Within those guidelines are product specifications that still go all the way to 100% financing.  That is only the first part of the story though.

Any loan package delivered to Fannie Mae and Freddie Mac requires not only Private Mortgage Insurance, but specific coverages as well.  Just like your car insurance, the higher the risk, the higher the rate of insurance.  In the case of mortgages, the closer you get to 100% financing, the higher the rate of insurance.  The worse the credit scores, the higher the rate of insurance.  You get the idea.  Now, the Mortgage Insurers are under no obligation to back every product that Fannie Mae and Freddie Mac have guidelines for, and this is where the product that we sell to the consumer is really crafted.

Like I said, currently there are guidelines in place at Fannie and Freddie for loans up to 100% Loan To Value of the subject property.  Five years ago we could even take that up to 103%, with mortgage insurance.  When individual markets began declining in value in 2008, Mortgage Insurers pulled back in a big way.  They immediately eliminated anything over 95%.  Then, they began scaling back to 90% and even 85% in some markets.  Slowly over the past two years, they have begun creeping back up to 95%, and most recently to 97% financing.  If you look at the guidelines currently in place at the Mortgage Insurers today though, compared to five years ago, there is a marked difference.  Current guidelines are significantly more stringent than they were previously.

So, what's out there?  The following programs are currently available for conventional financing.  Without getting into individual program guidelines and credit score requirements and differences in interest rate or origination fees, this is what we are offering as an industry right now, both for Single Family Homes as well as Condominiums.

• 97% Conventional Financing - Interest rate will be at least .50% higher than 95% conventional Financing
• 80% - 95% Conventional Financing - You shouldn't see any difference in interest rate, although the closer you get to 95%, the higher the mortgage insurance.

Stay tuned for the next post, where we will cover Loan Level Pricing Adjustments and Credit Score Requirements, followed by a post that is more specific to Mortgage Insurance Guidelines and some FICO score examples.  This will help to put it all into focus.

Happy Selling!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

 

Mortgage Boot Camp

Happy Friday Everyone!

So, when I posted last week regarding a new 97% Financing option, I just kind of figured the general response would be 'Woo Hoo'!  But, the response I received was a lot more '97 percent?  I didn't even know we could go to 95%?'.  And I started thinking about it.  I guess most of what you get from us in the mortgage industry is the negative.  We can't do this, we can't do that, we are cutting this program, and you need a higher FICO score for this program.  That's on us.  We should be telling you about what you can do.  What can be financed and what you can safely tell your clients is out there so that you can sell more property. 

Over the next couple of weeks I am going to post regularly regarding current Mortgage Programs and Guidelines.  Not the negative, but the positive.  What you can go out and sell this Spring.  What is going to get your First Time Home Buyers into their first Condo or Single Family Home.  What is going to get your move up buyer out of their condo and into that next property. 

We are going to cover Conventional and FHA.  Mortgage Insurance and FICO scores.  We'll go over what exists in terms of Second Mortgage products and what you can expect in the Jumbo market. 

So, stay tuned.  There is a lot of great information on the horizon. 

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

ChicagoAgent Magazine - Ask A Lender

Well, I guess I made the big time!  Here's my article from this month's ChicagoAgent Magazine.  You can also find it here at ChicagoAgent Magazine Online.

Ask A Lender

6 December 2010 No Comment

For this issue’s Ask a Lender, Joe Burke, a vice president of mortgage lending with Guaranteed Rate, answers questions posed by Chicagoland Realtors.

Q: I have spent countless hours and marketing dollars on condominium listings this year, only to find out on more than one deal that the condominium associations are not eligible for conventional mortgages. Is there any way to avoid this?
A: It has long been the norm to prequalify our potential buyers, but the same can’t be said of the properties themselves, and that needs to change. It is the logical next step these days when so many condominium projects are not currently ‘warrantable’ by Fannie Mae and Freddie Mac.

When a mortgage application is taken and the property or collateral is a condominium, the loan application is basically split into two separate underwrites. The first is the borrower package, consisting of income, assets and credit. The second is the condominium package, which is deemed by Fannie Mae and Freddie Mac standards as either warrantable or non-warrantable. If the condominium project is deemed non-warrantable, it is difficult, or even impossible, to obtain financing.

So, how can this be avoided? By prequalifying your client’s condominium association. While there are variances from lender to lender, some are more conservative than others when interpreting guidelines, there are 10 questions that can be asked up front that should give you a reasonable idea if there are going to be any problems that crop up during the mortgage process:

1. Is there a ‘Right of First Refusal’ in the condo declarations?
2. Does the project allow for a buyer to purchase more than one unit with a single mortgage?
3. Is the condo association currently involved in any litigation?
4. Does the project contain any commercial space? If so, what is the square footage?
5. Does any single entity own more than 10 percent of total units in the project?
6. Are more than 15 percent of the total condo units 30 days or more delinquent on their monthly assessments?
7. Is the project a condotel, have a rental desk, daily or weekly rentals?
8. Are there any special assessments currently approved, or have there been any in the past year?
9. If a unit is taken over in foreclosure or “deed-in-lieu,” is the mortgagee responsible for the delinquent HOA dues?
10. Does the budget call for at least 10 percent of the operating cost to be put into a reserve account as a line item in the budget?

Some of these questions can be deal killers if you get a “yes.” Others can be harmless to the transaction with the right documentation. And a few, if apparent up front, can be corrected before the unit ever goes on the MLS. But they will all become a problem during the underwriting process at some point if you don’t ask the questions up front, because the lender will.
As a Realtor, it has never been more important to have a strong relationship with a loan officer, who can help to prequalify your clients’ properties before the MLS. When a challenge presents itself prior to listing, everyone in the transaction can be prepared, the listing can be priced appropriately and potential borrowers can be targeted appropriately.

Q: If my client’s condominium association is deemed “non-warrantable,” are there any financing options available?
A: Yes, Guaranteed Rate has access to lenders that will finance a non-warrantable condominium project, but they won’t necessarily finance any non-warrantable condominium project. For instance, if it’s the owner occupancy that is an issue, there are lenders that will allow financing in the project. They will generally require a higher down payment and have a more limited product array, but are still generally very aggressive when it comes to interest rates.

Joe Burke is a vice president of mortgage Lending at Guaranteed Rate. He has been a loan officer since 2002 with a concentration in first-time condo buyers. He can be reached at 773.742.6707 or joe.burke@guaranteedrate.com.

The Dreaded 4506-T

How did this happen?  How did something as simple as verifying your clients income by pulling their tax transcripts from the IRS become such an issue during underwriting?

Over the years the purpose of the 4506 has not changed, however, it's usage has changed dramatically.  It used to be that having a 4506 in the file was merely a fraud prevention measure in that the Underwriter or end Servicer would only execute it in as a Quality Control document. 

Now, a 4506-T is executed on every single borrower, for every single loan application that is taken, in conjunction with the collection of W2's, Pay Stubs and actual Tax Returns from the borrowers.  This has caused a huge backlog and extended the time it takes to order and receive Tax Transcripts.  It is currently taking about 6 business days to order and receive Tax Transcripts from the IRS, while it used to take 24 hours. 

Is there a fix?  Probably not from the Processing and Underwriting side of things.  We are already checking and double checking addresses and requesting full Federal 1040's at the time of application, so that we order the transcripts correctly the first time around.  This one is really up to the IRS.  When the refinance volume goes down, it will surely help, but a faster automated system is probably going to be the only real fix. 

This is just one more instance of making sure that you set reasonable time frames for contracts and closings with your Borrowers and your Realtors. 

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

New Insurance Requirements for Condo Owners

Fannie Mae is once again stepping up with more stringent guidlines.  Some times I am surprised at these, other times I am just surprised it took them so long to put them in place.  This is definitely the latter of the two.

Fannie Mae announced in it's April 2nd Condo Project Release Notes, that as of May 4th 2009, it will require "borrowers to obtain a "walls-in" coverage policy (commonly known as an HO-6 policy) unless the lender can document that the master policy povides the same interior unit coverage". 

First, I can say with almost 100% certainty that if you own a condo, your condominium's policy does not provide for this.  At least, I have never seen it.  Second, you should already have this. 

An HO-6 policy proides coverage for everything inside the walls of your unit.  But, it doesn't just cover your valuables, but also your appliances, cabinets, counter tops, fixtures;  basically, everything inside the four walls of your condo.  Your coverage will have to be "not less than 20% of your units appraised value". 

On average, a policy of this nature should run you anywhere from $200 per year to $500 per year, depending on the amount you want to insure for and the appraised value of your unit. 

So, if you are buying a place, or in the process if refinancing and don't already have a "walls-in" policy, it might be time to talk to your Insurance Agent.  Or, talk to mine!

State Farm

Barbara Janusek

5554 North Broadway

Chicago, IL  60640

773-561-4335

barbara.janusek.hbr9@statefarm.com

 

Joe Burke

Your Chicago Mortgage Guy

joe@yourchicagomortgageguy.com

773-742-6707