Living in Lincoln Park Blog

Once again the misinformation is flying on what is going on with the Homebuyer’s Tax Credit Extension.  Tuesday the House of Representatives voted to approve an extension until the 30th of September, but presently, it is only a bill sitting there on Capital Hill (I hope that there are some Schoolhouse Rock fans who can appreciate that).  The Senate must now approve the extension and they voted against an extension earlier this month.  To clarify, however, there was unamimous belief that the extension needs to happen. But the bill upon which they voted coupled the extension of unemployment benefits with an extension of the Homebuyer’s Tax Credit.  Needless to say, all of this is a bit of a moot point as the Homebuyer’s Tax Credit expires today and any extension will be retroactive and transactions still need to have been undercontract prior to April 30th, 2010.

If closing in:

• 5-7 Days: I recommend LOCKING as rates have are extremely low and the benefit of FLOATING is nil.
• 7-15 Days: I would consider FLOATING, but markets are volatile so remain vigilant
• 15-30 Days: I recommend FLOATING as overall economic weakness supports long-term rate opportunities
• 30 or more days: I recommend FLOATING

Click here for more information or to discuss your real estate deal in greater detail

If you’re still fence sitting, waiting for ‘a good time to make your real estate investment’, consider this:  May 2009 vs May 2010 Chicago homes sales are up 33.6 percent!! You might want to rethink that fence sitting strategy!

In the state of Illinois, homes sales activity increasedfor the ninth consecutive month and for the past 11 months straight in the Chicagoland Primary Metropolitan Statistical Area,  Dr. Geoffrey J.D. Hewings, director of the   Applications Laboratory (REAL) of the University of Illinois said  “The forecasts for the next three months (June, July and August) suggest a continuation of the positive changes for sales—in the 16 to 25 percent range in Illinois and in the 19 to 29 percent range in the Chicago region.  Price changes continue to be stubborn, with little or no movement over the three months in Illinois and in the 4 to 6 percent range in Chicago.”    Less formal Realtor polls validates a street level view of these statistics and suggests prices are leveling off at 94-96% of asking price.

With mortgage rates hovering at historic lows and prices leveling off, consider this: It’s never a bad time to make a good investment.  It’s time to get off the fence! So, if you still haven’t found that perfect home, now is the time to ramp up your search and take advantage of the favorable market conditions!

If closing in:

• 5-7 Days: I recommend LOCKING as rates have are extremely low and the benefit of FLOATING is nil.
• 7-15 Days: I would consider FLOATING as there has been a further flight to quality this morning providing fuel for better rates
• 15-30 Days: I recommend FLOATING as overall economic weakness supports long-term rate opportunities
• 30 or more days: I recommend FLOATING

Click here for more information or to discuss your real estate deal in greater detail

As a lender, it is always interesting to hear the answer the income question.  Not that my clients are in any way intentionally misrepresenting their compensation, the fraudulent borrower is actually rare.  It is more a reflection of the chasm between what a client perceives their income to be and the figure that an underwriter uses.

 1.  If it cannot be documented, it does not exist

 This is the most important income rule.  There are a lot of borrowers with whom I deal who say to me I make X, but report Y.  This is very common for cash heavy businesses, such as bartending, where selective income reporting can occur and Uncle Sugar may not be getting his fair share.  This may be a good strategy to maximize cash flow, but not necessarily for loan approval.  Just remember that if it does not show up on your 1040, a lender cannot use it and in the end your purchasing power will suffer.

 2. History provides precedent

 Underwriters like a strong income history.  Two years is the gold standard in the industry.  This is less of an issue for salaried employees with a simple base compensation than it is for any type of variable pay, such as overtime, bonus and commission.  With bonuses, for example, you cannot count the income without a documentation for two-years.  If you have two or more years, but the figure is declining, expect to use an average or the lower of the two.  This can be devastating to both your deal and your ego if it is completely unexpected, so I recommend that borrowers take a very conservative view from the outset.

 3. Continuance is key

 As I stated above, history is important, but if the income will drop to zero then even decades of history does not matter.  For continuance, expect to be held to a three-year test.  Take, for example, a retirement situation under which the borrower is retiring at the end of the year.  The borrower could be a captain of industry earning seven figures, but, since they are retiring, that portion of their income will disappear and will be invalid for the loan approval.  This can also affect professionals such as athletes, who have a finite number of years guaranteed compensation.  Again, the key to avoiding unpleasant surprises is to think conservatively. 

 4. Business expenses can cost you

 Unreimbursed business expenses can be a great tool for you to squeeze the most out of a tax return by lowering your taxable income, but any time you lower your taxable income you affect your borrowing power for a mortgage.  The underwriter will analyze your tax returns and subtract these expenses.  After all, it is part of your income that is committed to something other than your mortgage payment.  So, if you were able to turn $150,000 gross income into $50,000 taxable income, you may be looking at a bungalow and not a mcmansion.

 5. Assets do not replace income

 This does not directly relate to income, but it is often the logical question from my clients who have a lot of assets.  The conversation usually centers on the ability of the borrower to pay their mortgage with the assets they have on hand.  This practice, often called asset liquidation, used to be acceptable but  has all but disappeared in this time of rapidly shrinking portfolios. Some niche lenders still allow it, but they are mostly in ultra-high net worth scenarios.   Under general lending guidelines, it is not allowable even if the value of the assets exceed the loan amount.

So there you have it.  Calculating income for mortgage loans is basically an exercise in conservative thinking.  Underwriters do not like risk. Undocumented income, income that does not have a historical precedence or income not likely to continue adds risk.  If you think like an underwriter going into your transaction, you will be better mentally prepared for the road ahead.

Whether you are with just getting started or are well in to your home search, it’s always good to know what to anticipate throughout the home buying process. Let me know how I can help you get the best loan for your home buying needs

If closing in:

• 5-7 Days: I recommend LOCKING as rates have are extremely low and the benefit of FLOATING is nil.
• 7-15 Days: I recommend FLOATING as there may be room for some improvement.
• 15-30 Days: I recommend FLOATING as overall economic weakness supports long-term rate opportunities
• 30 or more days: I recommend FLOATING

Click here for more information or to discuss your real estate deal in greater detail

Homes and insurance are starting to go the way of people and insurance…both can have preexisting conditions and be uninsurable! Many people don’t realize that if a homeowner has had multiple insurance claims on their property, a new owner may not be able to secure the insurance they need and want to protect their new asset.

If you are negotiating for the purchase of a home, you might want to ask that the seller provide you with a CLUE (Comprehensive Loss Underwriting Exchange) report on their home. This report can provide you with invaluable insight as to what issues your potential new home may or may have had. However, a buyer cannot have a report pulled on any house they so choose. These reports are available only to those with a “permissable purpose,” in this case the seller must request the report from their insurance carrier.  So if you’re buying a home in a flood plain, garden and duplex down condo, and any time your inspection has found signs of water it may not be a bad idea to dig a little deeper and ask the seller to provide you with a CLUE report for their home.

If you are not at this stage of your home buying process, and are still searching for that perfect home, call or email me, I would be happy to help! And, if you need to get pre-approved for your home mortgage, contact Doug Katz, he’ll take good care of you.

If closing in:

• 5-7 Days: I recommend LOCKING as trends are showing rates at historical lows and advantage of floating is minimal.
• 7-15 Days: I recommend LOCKING
• 15-30 Days: I recommend FLOATING as overall economic weakness supports long-term rate opportunities
• 30 or more days: I recommend FLOATING

Click here for more information or to discuss your real estate deal in greater detail.

If closing in:

• 5-7 Days: I recommend LOCKING as Mortgage Backed Securities are likely overbought and rate increase possible.
• 7-15 Days: I recommend FLOATING as the market still shows weakness in equities.
• 15-30 Days: I recommend FLOATING
• 30 or more days: I recommend FLOATING, overall economic weakness supports long-term rate opportunities

Click here for more information or to discuss your real estate deal in greater detail.

If closing in:

• 5-7 Days: I recommend FLOATING as markets a currently favorable to secure a better rate, but I recommend close monitoring of the market to take full advantage.
• 7-15 Days: I recommend FLOATING on weak economic data that does not support a continued rally.
• 15-30 Days: I recommend FLOATING
• 30 or more days: I recommend FLOATING, overall economic weakness supports long-term rate opportunities

Click here for more information or to discuss your real estate deal in greater detail.