New Down Payment Assistance Program in Park Forest, Chicago Heights

The Illinois Housing Development Authority (IHDA) is piloting a new housing assistance program called Illinois Building Blocks to help stabilize communities hit hard by the foreclosure crisis. The program has three parts:

1. Providing financing to local developers to purchase and rehab 10-15 homes to be resold to to low- and moderate-income families. In Park Forest this will be focused in the "W" and "M" streets. Starting this summer.
2. Providing a $10,000 gift as down-payment and closing cost assistance to home buyers earning less than $84,000/yr (for 1-2 person househould) to $104,000 (for households of 3+). Starting 3/1/12.
3. In conjunction with KeepYourHomeIllinois.org, providing foreclosure counseling, loan modifications, and financial assistance to homeowners unable to pay their mortgages due to unemployment or underemployment.

The communities involved in the pilot program are Park Forest, Chicago Heights, Riverdale, South Holland, Maywood, and Berwyn.

Common Questions Answered: Buying Short Sales & Foreclosures

Distressed property is all the rage these days. And it's a good thing: If it weren't for investors and bargain hunters snapping up low-priced inventory, we'd be in a whole different place (a much worse one).

When we speak of distressed property, we're primarily talking about short sales and foreclosures. In almost every initial conversation I have with any potential buyer, they inevitably ask me what the difference is between short sales and foreclosures. So I'll start there and pose a few of the most common questions I get, along with my answers. If you have a question I don't answer here, post it below and I'll get right on it.

Q: So what is the difference between a short sale and a foreclosure?
A: A foreclosure, also known as a bank-owned property or REO (real estate owned, which is how it shows up on the bank's books), is property the bank has repossessed from the owner due to nonpayment of the mortgage. The bank owns the property outright and hopes to sell it for as much as possible to recoup some of their losses on the deal.

A short sale is a situation in which, most likely, the owner has fallen behind on mortgage payments, the bank is moving to foreclose, and the amount owed on the mortgage is greater than the property's value (some call this condition "underwater"). The owner is trying to sell the property for whatever it's worth, hoping their lender would rather take a discounted or "short" payoff right now instead of seeing the rest of the lengthy foreclosure process through. So in this situation, the seller still owns the property, but their lender calls the shots.

Q: How long do these transactions take to close?
A: An offer on a foreclosure will usually get a response within five business days. After that, you can close within a normal time frame (30-45 days).

An offer on a short sale must be signed by the seller, then submitted to the seller's lender for review along with a litany of other documents. Depending on which lender holds the mortgage, how many mortgages and other liens there are, and the skill and experience level of the person handling the short sale (typically the seller's agent or attorney), buyers can expect a response to their offer within three to six months. That time frame is rarely shorter and occasionally longer.

Q: What additional risk is involved in buying distressed property?
A: Both short sales and foreclosures are sold "AS-IS." That means the seller is not going to do anything to the property and the buyer accepts it with whatever physical or legal defects it may have. Buyers CAN and always SHOULD have a home inspection done, and they can still back out of the deal if the inspection turns up anything unacceptable. The buyer is also responsible for passing any municipal inspections, purchasing all transfer stamps (even those customarily purchased by the seller), and ordering a survey if their lender requires one.

In the case of a short sale, the seller will provide the customary disclosures regarding the property's condition and any known material defects, as required by state law. A bank selling REO has likely never even seen the property; therefore it is exempt from those disclosures and buyers are truly on their own.

One thing that is NOT different about buying distressed property is that the seller (if it's REO) or the seller's lender (if it's a short sale) WILL provide the buyer with clean title and a title insurance policy, just like a traditional sale. That means they clear up any known liens on the property and pay or credit the buyer for any unpaid real estate taxes. You may open a can of worms fixing the place up, but at least you know it's yours!

Q: Should you include foreclosures and short sales in your home search?
A: It depends.

I almost always advise buyers to include foreclosures. They are frequently priced below-market and present great opportunities for instant equity. The only time we have to be careful with foreclosures is when a buyer only qualifies for FHA financing. When FHA appraises the property they expect everything to be intact and fully functional; they won't lend on it if anything is broken or missing (e.g. windows, a bath vanity or kitchen cabinets, a furnace). An ordinary seller might offer to get the property into "FHA condition," but if it's owned by a bank you can pretty much forget it. There are exceptions, but that's a whole other discussion.

I advise buyers to include short sales when their circumstances allow it. Due to the time frame they take to close, short sales are often a consideration for people who are not on a timeline: Those who don't have to sell and buy at the same time, investors purchasing multiple properties - in general, buyers who aren't in any sort of hurry. For buyers who need to close before their lease is up, live in a certain school district or area by a set date for school or work, or in general have to be moved by particular date, short sales are not recommended. Same goes for anyone who lacks patience!

Q: Which is a better deal, short sales or foreclosures?
A: Ah, the million dollar question. Where can you get the best deal? There are two schools of thought on this, but I believe foreclosures most frequently present the best opportunities. Why? Primarily because of the way the bank determines what price they'll take for a house when they already own it, which is different from how they evaluate it when the borrower still owns it.

With short sales, once an offer is received and submitted to the seller's lender, they hire an appraiser to give them the current, as-is market value of the property. They will usually accept a certain percentage of that value, commonly about 90%. If there are other liens on the property, such as a second mortgage or delinquent property taxes, those liens need to be satisfied too - after the lender who holds the first mortgage gets their 90%. So the best deal you're going to get is 90% of the property's current as-is value, as determined by an appraiser, but you might have to cough up a little more depending on secondary liens.

With foreclosures, the price is determined by an asset manager who bases his/her decision on a BPO - that's a broker opinion of value, a report completed by a real estate agent who is often going to be the one listing the property for sale. It's in the agent's best interests to get the bank to list the property for an attractive price. In fact, many banks request the BPO agent to recommend a "30-day sale price." So when these listings come on, they're often at hot prices.

A few years ago when short sales were just coming on the radar, banks used desktop valuations or BPOs for short sales instead of appraisals, and they didn't have the procedures and rules they have in place now. It's those appraisals, procedures and rules that have changed the game with short sales and made foreclosures more attractive in my experience.

I did a little research to back up my belief, for those who might disagree. I looked at the median sale prices of all foreclosed and short sale residential property that has sold in the past 12 months in Oak Lawn, Matteson, Tinley Park, and the Loop (as of October 2011). In every case, the median sale price of foreclosures was lower than the median sale price of short sales - by anywhere from 3% (in Matteson) to almost 30% (in Tinley Park). Further, in all three suburban areas, foreclosures sold for a larger discount off their asking prices than did short sales. That didn't hold up in the Loop where foreclosures sold for a median of almost 107% of their asking prices - but that was still 19% lower than the median short sale price.

So if you have any general or specific questions I didn't touch on here... Fire away!

So what the heck IS mortgage insurance anyway??

Mortgage insurance, or what you may have heard referred to as "PMI," is not to be confused with homeowners insurance (which is also known as hazard insurance, property insurance, etc.).

Mortgage insurance is an insurance policy that benefits mortgage lenders in the event they have to incur the costs of foreclosing on a property. Lenders require this insurance if the borrower is putting less than 20% down, due to the lender's increased risk in making such a loan. The borrower pays the premium on a monthly basis as a part of their mortgage payment, and the mortgage insurance premium is sent to a mortgage insurance company. If the borrower defaults and the lender has to foreclose, the mortgage insurance company kicks back a portion of the loan amount to the lender.

How much is that premium? It depends on many variables such as property type, credit score, location, current market conditions, etc. But for conventional loans, the range is from about .8% to 1.25%. Example: Take the initial loan amount, let's say $100,000. Multiply it by the rate, for instance .85%, and you get the annual mortgage insurance premium, in this case $850. Divide that by 12 and that's the monthly premium (about $71/mo in this example).

The Federal Housing Administration is essentially a public mortgage insurance company. So when you hear about an "FHA loan," that means the mortgage insurer is FHA. For an FHA loan with a minimum down payment of 3.5%, the annual mortgage insurance rate is 1.15% - higher than MI rates for conventional loans. Additionally, there is an upfront premium due at the closing in the amount of 1% of the loan amount. The upfront MI can either be paid at closing or rolled into the loan. Why pay more for MI by choosing an FHA loan? Because they offer better interest rates and less stringent credit and income requirements than conventional loans, and if you have a non-traditional job/career you're more likely to qualify for FHA.

In some cases, a borrower may qualify to buy out MI (on conventional loans only) by paying a fee at the closing. If the borrower's credit score is high enough (at least 700) and their debt ratio is low enough (45% or lower), they might be able to pay a fee of 1-2% of the loan amount in lieu of paying a monthly MI premium. Using the same numbers in the above example, this would be an upfront fee of $2,000 that would allow the borrower to get out of the $71 monthly premium. In this example, the borrower saves money if they keep the loan for more than 28 months.

Another way to avoid mortgage insurance is to get one mortgage for 80% of the purchase price and a second mortgage for 10% or 15% of the price, which still allows the borrower to put only 5-10% down. This strategy was used, abused, and squeezed to the last drop during the credit bubble, and it is much less common today because of the problems it caused. The problems came about because the second mortgage is always either an adjustable rate mortgage or a variable line of credit with a balloon date - aka "ticking time bomb." [You may have heard of an "80/20" - that's a first mortgage for 80% of the price and a second mortgage for 20%, with no down payment from the borrower. These were all the rage in 2005, then the rates on the second mortgages adjusted 3-5yrs later, payments skyrocketed and homeowners tried to sell. But they owed more than their house was worth because housing prices had already peaked. Enter housing meltdown.]

There is at least one loan program out there that allow borrowers to put down less than 20% but not pay MI. It is called HomePath Mortgage - special financing offered by Fannie Mae only on their foreclosures - and it comes with a minimum 3% down for owner occupants or 10% down for investors, both with no mortgage insurance.

Even if you can't avoid MI, not all is lost. The Homeowners Protection Act of 1998 laid down federal laws that require the cancellation of MI after certain conditions are met. A borrower can request MI cancellation after the loan balance reaches 80% of the initial purchase price, but the lender doesn't have to grant it. However, once the loan balance reaches 78% of the initial purchase price the lender must automatically cancel the MI. Of course there are exceptions - for more detailed info on those, check out this article on the FTC website.

And lastly, the MI premiums you pay may be tax deductible due to the Tax Relief and Health Care Act of 2006. That law created a tax deduction for MI premiums on policies issued on or after 1/1/2007 and was extended for policies issued through the end of 2011. Of course, again, there are exceptions summarized in an article on Bankrate.com, but you should speak with a tax professional to get specifics.

Mortgage insurance isn't looked upon favorably by the public, but it's a necessary evil and I'm glad it's here. Otherwise, every buyer in the nation would need 20% down and the housing market would be infinitely worse off. I'll leave you with a heartwarming, redeeming feature of mortgage insurance companies: MI companies have an interest in preventing foreclosures, because foreclosures mean they have to cough up cash to lenders. So if you ever get behind on your mortgage payment, call the MI company directly and see what they can do.