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

 

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

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

Get your FHA Applications in, PRONTO!

Happy Friday Everyone!  Hopefully you are not in front of a computer right now, seeing how it's 70 degrees here in Chicago and March Madness is in full swing.  I'll make this brief, but want to get this in front of everyone before they go out and sign a contract this weekend.

First, as stated previously, you have until April 4th to get your FHA application in and only get hit 1.75% for the upfront Mortgage Insurance Premium.  As of April 5th, it goes up to 2.25%.  So, if you have a contract, or are about to sign a contract, do your shopping quickly and make sure your lender gets their FHA Case number prior to April 5th.

Second, we are starting to get a sense of how long the Condominium Approval process is going to take when submitting an FHA application in a condo unit.  We are doing the initial Condominium Approval process in house before we send it off to HUD for final approval, and I am still quoting people a minimum of 60 days from contract date to close.  It is taking 10-15 business days in house and another three weeks once we submit our approved package to HUD for final approval.  Those turn times are only going to increase as we get closer to the April 30th deadline for the First Time Buyer Credit.  So, if you are looking to finance a condominium through FHA, best to get your application in well before that deadline.  We will talk more and more about this over the next two weeks here, so stay tuned.

That's all for now.  Call me or email me if you have any questions.  As long as they aren't about the NCAA, my brackets are already busted. 

Good Luck and Happy Friday!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

FHA FMIP Increase, and lots of other acronyms...

It's official, and it doesn't look like it will be delayed or changed.  Effective April 5th, 2010, FHA Upfront Mortgage Insurance Premiums will increase to 2.25% of the base loan amount.  Currently the Mortgage Insurance Premium(MIP) is 1.75% of the base loan amount.  This will effect every FHA loan originated and receiving an FHA case number on or after April 5th, 2010.  Just in time for the expiration of the Home Buyer Tax Credit.  Nice that these agencies are all talking to one another about timing impementation of these items.

Here's how it works.  If you have a $100,000.00 purchae price, and are putting down 5% through FHA, your base loan amount would be $95,000.00.  Take $95,000.00 and multiply it by 2.25% and you end up with a Mortgage Insurance Premiuim (MIP) of $2137.50.  As the borrower, you can either pay that up front, or roll it into the loan amount.  If you roll it into the loan amount, your new initial loan is now $97,137.50.  The MIP is now called your Financed Mortgage Insurance Premium (FMIP).  Currently at 1.75%, that MIP is $1662.50, so there is a significant increase in cost to do an FHA loan.

So, why would HUD do this?  Especially right before the tax credit is coming to an end?

The upfront MIP you pay at close goes into an insurance pool that supports all FHA Insured mortgages, nationwide.  Every time someone defaults on a loan, this insurance pool is dipped into.  Put simply, this insurance pool is going broke.  It is WAY below the federally mandated minimums that it is supposed to maintain, and it will be flat broke before the end of the year if all of the current trends hold.  So, by increasing the FHA premiums for new borrowers, it should help stabilize and hopefully increase the liquidity of this insurance pool.  Unfortunately new buyers are paying for the sins of past buyers.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

Mortgagee Letters and HUD

In June, HUD released Mortgagee letter 2009-19 announcing changes to FHA Condominium guidelines effective October 1st, 2009.  The changes outlined in the the letter are big ones and will effectively change the way every lender processes condominium approvals through their system.  So, now it is September 16th of 2009 and we haven't had any follow up from HUD as to how these changes are going to be put into place and what our internal procedures are going to look like to comply with these changes.  There has been a lot written about these changes in the last three months, but none of it has been vetted with HUD.  HUD only communicates guideline changes through it's official Mortgagee Letters and there hasn't been another one issued on the topic since June.

Now I am hearing whispers that the October 1st deadline is going to be extended until Novermber 2nd.  Again, more rumors.  This could have some serious consequences for some in the market place.  I know for fact that there are potential buyers and sellers that were looking at a window of opportunity between October 1st, when the new guidelines go into effect and November 30th, when the $8000 tax credit expires.  So, if you are out there and you are counting on this, stay tuned, there might not be good news on the horizon.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

Are the new FHA condo rules set for October 1st being pushed back???

Stay tuned....

Your Chicago Mortgage Guy

773-742-6707

FHA Changes and Right of First Refusal - Little Help?

In June, HUD issued a mortgagee letter stating that essentially, right of first refusal will be allowed, as long as it does not violate discriminatory practices in the Fair Housing Act regulations.  Well, it's been two months and we still don't have any clarification from HUD as to how this is going to work.  I don't want to sound like Mister Negative here, but I am having a hard time getting anything from anyone regarding these new rules.  The experts I have spoken with are very skeptical about whether this is actually going to happen.  The reason has to do with the wording in the mortgagee letter.  Basically, it still says that we have to prove to HUD that each individual project with a 'First Right of Refusal', isn't violating any discriminatory practices.  There isn't exactly a database set up to cross reference here.  Does that mean we will have to get an attorney to certify each project?  Will HUD certify on there end?  Nobody seems to know. 

So, I am asking for your help here.  There are tons and tons of other bloggers and loan officers out there touting that we will be able to close on these as of October 1st.  Does anyone have anything from a lender or condo department stating this?  If so, please forward along.  I would love to see something more concrete that what is currently on the web.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

Fact Verses Fiction, Truth And Rumor

This is undeniably one of the most confusing times ever in the mortgage and real estate industry when it comes to guidelines for buying a home.  I get phone calls daily from agents and buyers who are confused by the litany of opposing view points and opinions when it comes to mortgage guidelines and the First Time Home Buyer Tax Credit.  I don't have all of the answers, but I can tell you what I know to be fact.  If you have proof that I am wrong, please forward it along.  There is a lot of different opinions on much of this stuff, but opinions are not fact.  When you go to finance your home, the only thing an underwriter cares about is the facts.

Fact

Right of First Refusal - This is the big one.  In Download Hud Mortgagee Letter 96-41, dated August 1, 1996, Hud outlines it's guidelines for obtaining a "Spot Approval" for condominium units.  In this letter it states specifically "The Projects documents should not place any legal restrictions on conveyance.  Any provisions that seek to limit the free transferability of title is generally unacceptable.  Such restrictions include rights of first refusal and restrictive covenants".  There has not been a mortgagee letter from HUD since then that has removed this stipulation.

Fiction

The Condo Association can waive the Right of First Refusal and then make the units within the project eligible for Spot Approval.  This simply is not true.  If you don't believe me and you can provide proof from HUD, I will post it here with an apology.  I have spoken with HUD and with numerous experts in the mortgage industry.  This simply is not true. 

Fact

2-4 Unit Condominium projects will be eligible for FHA financing as of October 1st.  This is true and will open up thousands of potential properties for financing that were not previously eligible.  However, current FHA guidelines have not changed, so technically, only 1 unit in these projects will be eligible for financing at any given time.  That means that once a unit in your 2-4 unit project is FHA financed, no other unit is eligible while that FHA financing is in place.  It will still be important to be asking listing agents that question up front.  This is true for FHA case numbers obtained on or after October 1st, so it will affect closings at the end of October to early November.

Fiction

Lenders cannot finance with less than 15% down in 'declining markets'.  We are still able to obtain a Mortgage Insurance Certificate on a one by one exception basis for 'declining markets'.  It is not a slam dunk, but if the rest of the file is strong, we have been getting these done without much hassle.

Fact

As of October 1st, the Spot Approval Process will no longer exist.  This is true.  At first it will seem a little cumbersome as we have not received great guidance from HUD regarding what this process is going to look like.  Once we are up and running though, it should greatly streamline the process.

Fiction

First Time Buyer Tax Credit in 2010.  This is a tricky one.  I keep hearing and seeing in print on the web, 'rumors', that the First Time Buyer Tax Credit is already set to be extended into 2010.  I have also seen 'rumors' that it is going to be increased and that it will include all buyers.  But, if you search the net and any reputable news source, there isn't one, not one, instance of somebody going on the record regarding this.  Do you know why?  Because nothing is set.  Congress will not even take this up until budget hearings in November in December.  And, there is no way that anyone would say anything to slow down the momentum that the current tax credit has taken on for the end date of November 30, 2009.  Why would they want to discourage anyone from buying this year and strengthening our current housing market? 

Here are a couple of other things to ponder.  Home sales were just announced to be up in July for the fourth straight month.  Ben Bernacke gave his most glowing assessment of the economy last week since he has been Federal Reserve Chairman.  All economic indicators point towards the first growth in GDP in the fourth quarter in a year and a half and for the first time, people are starting to talk about inflationary pressures next year.  What will that mean?  Higher interest rates for one thing.  For another, there won't be as much urgency in congress to extend a costly program with the largest federal deficit in history hanging over their heads.  So, sober up.  And get out there and buy your first property before this tax credit goes away, because there is NO guarantee that it will be around next year.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

 

Multi Unit Opportunities Abound at 3.5% Down

Well, as the saying goes, with any disaster comes opportunity.  I have never in my career seen two, three and four unit properties at prices as low as I am seeing them today.  And for the first time in years, the rents are covering the cost of the mortgage, taxes and insurance.  The challenge?  Conventional Multi Unit financing requires 20% and 25% down and has higher than average fees and interest rates.  The answer?  Like everything else these days, FHA.

This is a great opportunity for anyone who is willing and able to live in there multi unit to get into a building at a great price with as little as 3.5% down.  That's right.  If you are financing an Owner Occupied two, three or four unit property, you can still get in with 3.5% down.  You can also ask for as much as 6% in seller closing cost credit to cover cost and to buy down your mortgage if you find the right seller and the right deal.  On top of that, there is no hit to your interest rate on a multi unit property through FHA.  A Borrower is eligible for the same 5.5% interest rate that the condo or single family buyer is getting without paying any additional points.

So what do you do?  Get pre-approved.  Find a patient, knowledgeable Realtor who knows the Multi Unit market and and understands FHA financing and get out there.  If you want to get pre-approved or get the name of a great local Realtor, just give Your Chicago Mortgage Guy a call and get yourself on the road to owning that apartment instead of renting!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

FHA Changes, Right of First Refusal and 2-4 Unit Properties

It's only been a couple of hours since my last post and I am already getting questions on the two biggies in the FHA condo realm;  Right of First Refusal and 2-4 Unit Properties.

In HUD's Mortgagee Letter 2009-19, it states "Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100.  Here's a link to a Fair Housing Authority where you can see the depth and scope of these discrimination suits.

I didn't include this in my earlier posting because it is my belief that this verbiage basically doesn't change anything.  I might be wrong on this, but as it reads, it sounds like the "right of first refusal" is still going to be a giant obstacle for FHA lending.  Until lenders start defining and putting out there individual guidelines on this, we won't know if anyone is going to take a chance on these projects.  Since FHA is leaving it up to the end lender to prove to them that the "right of first refusal" does not violate the Fair Housing Act's regulations, the end lender is then on the hook if they are proved wrong in an audit or quality control situation.  I just don't see lenders putting themselves out there like that.

To me, the single biggest change is in regards to 2-4 unit condominium projects.  That opens up THOUSANDS of potential projects for FHA financing in Chicago, since Chicago is basically a series of neighborhoods with 2-4 unit buildings.  The fact that only 1 of the units can have FHA financing won't even matter for the first couple of years because NONE of them currently have an FHA financed unit in them.  I know tons of Realtors out there banging there heads against the wall with FHA buyers that would love to look at units in these buildings, but can't even walk into an open house for fear of falling in love with something that they cannot get financed.

Last.  FHA is making it harder on buyers with lower credit scores.  They have raised there floor from 580 to 620 for a minimum FICO.  Anyone between 620 and 660 will now need 10% down.  Apparently, these loans are not performing very well.  Hard to argue that point.  If you are currently preapproved for an FHA condo and have less than a 660 score, talk to your lender.  You may need to rethink your purchase.

Joe Burke

Your Chicago Mortgage Guy

joe@yourchicagomortgageguy.com

773-742-6707

Huge, Monster Changes to FHA Condominium Approval Process! And, It's For The Better!

Unbelievable.  Something that makes sense coming from HUD.  I will give credit where credit is due, these changes are HUGE!

In the U.S. Department of Housing and Urban Developments(HUD) June 12, 2009 Mortgagee Letter 2009-19, they outline a series of significant changes to FHA Condominium Approvals effective, October 1st, 2009.  To start with, "FHA will now allow lenders to determine project eligibility".  Basically, that removes one layer from the process that already has too many layers.  FHA is giving lenders to options for approving projects that are much more in line with what Fannie Mae and Freddie Mac already have in place for project approvals.  Lenders will have the option to either get an entire project approved through a full legal approval process(HRAP) or a "Direct Endorsement Lender Review and Approval Process(DELRAP)".  The Direct Endorsement process is almost identical to the full condo review process already in place for conventional mortgages through either Fannie and Freddie.  Gone is the FHA "Spot Approval". 

 Download HUD Mortgagee Letter 2009-19

Wait, it gets even better.  I am only going to outline the significant changes that will affect you in the Chicago and Chicago suburban market places. 

First, Condominium approval will no longer be required for "detached" dwellings that are encumbered by a decleration of condominium covenants.  This will affect single family developments where there is a condo association in place.  There will still be some extra paperwork involved, but not a full condo review as we know it now.

Second, FHA-FHA streamlined refinances will no longer require a condo review.

Third, and this one it the biggie, projects consisting of 2 or more units will now be FHA eligible condominium projects.  The only caveat is that no more than 1 out of 3 units can be financed through FHA.  Still, this opens up thousands of potentialy eligible projects in the Chicago area.

That's the big stuff.  Now, lenders will still have to decide internally how they will set out to conform to these new guidelines.  Condo questionaires will be tweaked and likely, there will be some things added that we haven't seen before because now the onus is on the lender to prove to HUD and FHA that they did their due dilligence when approving these projects.  But, this is a huge step forward for FHA.  They are showing us that they can indeed adapt to our current market and that they are willing to help potential buyers get into properties in a reasonable amount of time with a reasonable amount of srcutiny to the buyers and properties themselves.

We likely won't see lender guidelines for a couple of months as these changes don't go into effect until October 1st, 2009.  I will post more as I see it.

Joe Burke

Your Chicago Mortgage Guy

joe@yourchicagomortgageguy.com

773-742-6707