Current Real Estate Buzz Words
If you’ve recently applied for a mortgage, or if you’ve been reading the financial section of the Sunday paper, you’ve likely seen terms and phrases such as “Declining Market,” “Credit Counseling,” and “HOA Tax Credit.”
In an effort to explain some of this new “jargon,” we offer some definitions.
Declining Market
When you hear the term “Declining Market,” it doesn’t necessary mean that “the market is declining.” Declining Market is actually a shorthand guide referring to an approval guideline from lenders.
Late last year, Fannie Mae announced mortgage-underwriting guidelines affecting thousands of homebuyers and homeowners. These guidelines updated the maximum loan to value (LTV) ratios that Fannie would purchase from mortgage lenders selling those same loans to secondary investors.
All maximum loan amounts were cut by 5% for properties listed in a “Declining Property Value Area.” This was deemed when:
- Underwriting systems returned a declining property value notice,
- Properties fell into areas considered as declining according to written guidelines from PMI companies, and
- Appraisals listed a property as located in a declining market.
In other words, a client who saved $15,000 for a 5% down payment towards a $300,000 purchase would need to deliver $30,000 for that same purchase carrying the same mortgage financing. As you can imagine, this caused a number of transactions to be cancelled.
So what’s the solution?
PERL works with government loan programs through the FHA, requiring less than 3% down. And if your dream home happens to be located in a declining market as determined by the above guidelines, you might qualify for 100% financing.
Credit Counseling
SB 1167 is an Illinois law requiring every new mortgage in Cook County to be entered into a predatory lending database to determine if the client will need to attend a credit counseling meeting. Loan components such as interest-only or high loan-to-value ratios may trigger mandatory counseling.
As required by the State of Illinois, clients must attend a 3-hour verification meeting if they meet one of each of the these standards:
Set 1 (Borrower type / Property type)
- Purchase transaction, when ALL borrowers are first-time buyers
- Refinance of an owner-occupied property
and
Set 2 (Loan type)
- Interest-only payments
- Negative amortization
- Points and fees exceed 5%
- Prepayment penalty
- Adjustable rate mortgage (ARM) allowing for resets within the first 3 years
This legislation is not connected to any of PERL’s products, and does not affect the entire State of Illinois. Just properties within Cook County. And even though attendance is mandatory prior to closing, SB 1167 only applies to 5-10% of PERL’s entire client base.
If required to attend, your session will proceed much more quickly if you bring the following documentation:
- Copies of your Good Faith Estimate, Truth-In-Lending statement, loan application, and current credit report
- Pay stubs for wage earnings from the most recent month
- Federal W-2 forms and Federal Income Tax forms from the most recent 2 years
- Any other proof of income, such as:
- Pension / Social Security
- SSI Disability
- Child Support Income and/or Alimony
- Subsidized Adoption payments
- Foster Care payments
- TANF / other cash public benefits
- For rental income: please bring a copy of all current leases
Keep in mind: SB 1167 only applies to 5-10% of PERL’s entire client base, and was enacted to ensure that borrowers meeting certain conditions will be given the authority and know-how to make smart home buying decisions.
HOA Tax Credit
“HOA Tax Credit” refers to the Home Owner’s Association Tax Credit, or H.R. 3221: the Housing and Economic Recovery Act of 2008 (recently passed by Congress). This allows first-time homebuyers to take a $7,500 tax credit from the purchase of a new home.
Eligibility Requirements
Any U.S. citizen who has not owned a home in the past three years may apply for this credit.
- Deal must close prior to July 1, 2009.
- Single borrowers: gross annual income less than $75,000.
- Married loan applicants: gross annual income less than $150,000.
- Partial tax credits are available to single applicants earning between $75,000 - $95,000 per year, and to married applicants earning between $150,000 and $170,000.
How the Tax Credit Works
When a taxpayer pays less than $7,500 in federal income taxes, the U.S. Government writes the individual a check for the difference.
For example, if a borrower owes $5,000 in federal taxes, they won’t pay anything – and will receive a $2,500 payment from the IRS. Buyers will have the option to take the tax credit on their 2008 or 2009 tax return.
The tax-credit program also has payback provisions. The credit serves as an interest-free loan to be repaid over 15 years.
For example, a homebuyer claiming a $7,500 credit will repay the credit at $500 per year. If the owner sells the home, the remaining credit will be due from the profit of the sale. If there’s an insufficient profit, the remaining payback will be forgiven.
The National Association of Home Builders has launched a website with frequently asked questions on how consumers can use this credit. For more information, please visit www.federalhousingtaxcredit.com.
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Good News
As we read reports about economic recession and market downturns, everyone’s eager for news of positive fluctuations. Visit www.happyrenews.com (provided by IMS, a realty research company) for the brighter side of things. It serves as a good reminder that we usually only hear about national trends – and that this country is home to countless housing markets, from neighborhood to neighborhood – with favorable activity across the country.
For example, there are currently over 2,000 neighborhoods across the country exhibiting positive growth. Happy RE News provides monthly updates with market reports and city-by-city trends, with transparent definitions on how market percentages are calculated — and how national conventional wisdom is reached.
And if you’re shopping for a new home, visit the site to confirm what you’re hearing on the street.
At a time of historic market developments, a dose of good news never hurts.
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One Loan Can Be Better Than Two
Mortgage Insurance (MI) is an insurance policy required for borrowers with down payments between 5-20% for purchase transactions. To obtain MI, a borrower must put at least 5% down.
Over the years, many clients have chosen to obtain a second “piggyback” mortgage as a substitution for MI. But things have changed. Due to recent fluctuations in the secondary mortgage market, MI has increased in popularity by both lenders and clients – and is tax deductible.
Here’s how it works:
MI can be payable up front, or capitalized onto the loan as a single premium product. Once the loan principal reaches 80% of your home’s purchase price – either as you pay down your loan, or your home rises in value – MI is no longer required.
What’s more, MI became tax deductible in 2007 in the United States. For some clients, obtaining MI is actually less expensive than securing a secondary “piggyback” loan. The law provides for an itemized deduction of the cost of MI for all homeowners earning annual salaries up to $109,000.
Contact your PERL loan officer today to learn more about MI – and take advantage of this exciting development!
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Reduce, Re-use, Recycle
PERL takes the idea of “going green” seriously – and we’re able to save more paper and resources than ever before. In fact, you can now apply for a loan using only a computer (and a phone call, of course).
Here are some tips to make your office greener:
Keeping your computer “powered up” during off hours isn’t always a necessity. Set your computer’s energy-saving settings, and make sure you “shut down” each night before leaving. Also – use a power strip. It consolidates power and protects your hard drive. When leaving for an extended period of time, unplug printers, scanners and other peripherals.
Keep files stored in your computer and on hard drives, not in filing cabinets. Review documents on your monitor, not at the printer. Introduce work file sharing programs such as Google Docs to your office – and watch your productivity increase with faster communication
Did you know that workers in America spend an average of 47 hours per year in rush hour traffic? If you live in a big city like Chicago, it might even average 47 hours per month. Consider carpooling, public transportation, biking, or even walking. If you must drive, consider a hybrid – and ask your employer to start a bonus program for driving a greener car!
44 million Americans can’t be wrong. Numerous online tools make the home office an indispensable, timesaving feature of greener lives. Instant messaging, video conferencing, and other innovative telecommunication tools help you save on travel and commuting costs.
Share these tips with friends and colleagues. Ask about fair trade coffee for the break room – and help make going green easy for everyone!
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Credit Tip
This holiday season, cover your bases before you start hitting your favorite online stores and shopping malls. Call your credit card companies to confirm your available balances and credit limits – and, if you’re anticipating spending close to your limit, ask the company to extend your available credit.
If you carry a higher-than-average balance on your credit card, your monthly debt-to-income ratios may change – and this can affect your ability to successfully apply for a loan.
Aligning your spending habits with your available credit is just a phone call away – better safe than sorry!
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