The Return of the Chicago 2-Flat
There was a great article in the Chicago Tribune about five or six years ago. It spoke of the incredible values of the Roscoe Village 2-flat and how it had been a tried and true starter home for generations in Chicago. The rent would subsidize the mortgage and appreciation would compound on a larger home value.
Fast-forward to three or four years ago, prices had skyrocketed as investors were buying 2-units with as little as 5% (eventually 0%!!!) down. The values weren’t as extreme as before. In fact, many were selling for more than the value of the cash-flow of the building. Many first-time homebuyers opted for the condo. It made sense.
Fast-forward to about one year ago: Rates were high, uncertainty was high, and the housing market had years of unsold inventory sitting idle. Values, values everywhere and nary a loan in sight.
Fast-forward to today: The Existing Home Supply has dropped significantly, the $8,000 tax credit continues to push a surge in home purchases, and mortgage rates continue to hover near 5%.
Home supplies are off 23% since November of 2008. We are consistently hearing that the remaining condominium inventory looks like a shopping rack after a massive sale. Thin.
If the 23% most desirable homes are now gone, where are all the values hiding?
Well, if what caused the quick drop in real estate prices was the lack of mortgage financing options effectively freezing the housing market, has the 2-flat become the savvy option again?
The supply has certainly not been picked through as hard as the condo market. While Fannie Mae has tightened up many guidelines, they’ve hit two groups the hardest:
- Credit scores between 620 and 739 have varying levels of extra fees
- 2-Units: now require a 20% down payment
This is a staggering reversal from Fannie Mae and has significantly reduced the amount of competition in the 2-flat market.
Enter the FHA 2-Unit
The FHA 2-Unit still only requires a 3.5% down payment. The rent from the subject property can be included in loan qualification calculations. The mortgage insurance varies from .5%-.55% based on down payment. The mortgage rates are not as credit-driven as Fannie Mae’s.
At today’s mortgage rates, rent of roughly $550/month supports roughly $100,000 of loan and mortgage insurance payment. A rental unit earning $1100/month supports nearly an additional $200,000 of loan and mortgage insurance payment. For many of our recent home loan approvals, the combined debt-to-income ratio was actually LOWER on the 2-unit than the condo.
While FHA Condominium Approvals are changing, the condo approval issues remain the same: Are there adequate reserves? Are there too many FHA loans in the building? Are there too many investors in the building? Is there too much commercial square footage? These are not questions for a 2-flat buyer.
Is a 2-flat the right option for you?
I saw something on CNN this morning: 63% of Americans said their personal finance habits would change “permanently” based on the lessons of this past year. Let’s protect our homes the way a home ought to be protected.
To make the 2-flat a conservative option, I’d assume 25% vacancy on the rental unit. That is to say, can I comfortably stomach the payment on my income plus 75% of the rental income?
To make the repairs and maintenance more easily budgeted, I’d set aside 1% of the value of the home annually for repairs. At some point the expenses will arise, this allows you to sleep easier.
To help me expect the unexpected, I’d reach six months principal, interest, taxes, and insurance in cash or equivalent as fast as possible.
Is the 2-flat a good idea? Yes, it’s a great idea. The difference between a great idea and a great decision depends on the planning and team of professionals. If you need a referral of a qualified Realtor who understands the multi-unit market or a financial planner to discuss the impact on your finances, contact us.
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FAQ: IHDA Home Start $8,000 Federal Tax Credit for First-Time Homebuyers
When must Home Start loans close by?
These must close on or before November 30th. There are no guarantees that the tax credit will be extended on a federal level nor are there any guarantees that IHDA would continue the program if the federal tax credit is extended.
What is the minimum down payment?
The combined Loan-to-Value can be 100%. The borrower must be able to document 1% of their own funds to qualify.
What loan(s) make up the Home Start program?
The first mortgage is an FHA 30 Year Fixed rate. The second mortgage provides up to $6,000 as a second mortgage.
Are there income or purchase price limits with this program?
There are two links from IHDA that might help:
Are there any limitations on property types?
This applies to existing 1-unit, single family homes, HUD approved condominiums, and townhomes. Ineligible property types include NO new construction and no condominiums that have pending litigation.
Where else can I learn more?
How does the Home Start program compare to other options?
The mortgage rate is going to be higher than the normal Chicago mortgage loan FHA interest rate. Right now, the spread is about .5%. That’s a pretty big spread. Here’s how I’m looking at this:
- For someone with access to a 3.5% gift from a family member, that is a better option that Home Start: You avoid the strings and hoops of the Home Start program and get a better mortgage interest rate. Buying now at low rates and low home prices seems like a good play if it is affordable.
- For someone without access to a 3.5% gift or down payment, this is a significantly better option than doing nothing. Let’s presume that it would take you 6 months to save up the full down payment. Mortgage rates would likely be .5% higher anyway and home prices are on the rise.
Home Start allows people to act now. With countless stocks that have jumped 800-900% (mortgage insurers, Fannie Mae, Freddie Mac, etc.), we’re seeing some investment in housing-related stocks. I don’t know when the housing market hit its low, but I know that the day that CNN reports that housing is recovered will be too late to buy a home at these current levels of affordability.
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Conforming v FHA Loan Calculator
Chicago Mortgage Loan Option Comparison
I had an interesting comparison the other day and the numbers sort of surprised me. Notes:
- * The purchase price is ficticious, but these rates were real at the time that I was doing the math. Changes in mortgage rates would change the calculations in this post. Check Current Chicago Mortgage Rates
- ** Payment Total disregards property taxes and insurance because they won’t vary based on the loan program. This is for illustrating the mortgage performance solely
- *** At closing disregards all fixed closing costs, transfer stamps, etc. This is solely attempting to isolate the impact of the Up-Front Mortgage Insurance Premium on the FHA loan versus the Fannie Mae / Freddie Mac Loan Level Price Adjustment on the Conforming Option
Results from Conforming and FHA Mortgage Calculators
I’m assuming a $200,000 purchase
| Quick Assumptions Credit Score 700 Down Payment 5% FHA Up-Front Mortgage Insurance 1.55% FHA MI Factor 0.55% Conforming Up-Front LLPA 0.5% Conforming PMI Factor 0.94% |
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Payment Edge: FHA
Okay, so we have a slightly better payment with the FHA Loan ,but let’s look at the impact of that up-front mortgage insurance. What we’ve done here is include any upfront interest payments, plus the mortgage insurance premium, plus the cumulative interest. In other words, we’ve removed the cumulative principal to get a truer estimate of the total cost of the mortgage loan. Results:
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Total Costs Edge: FHA by a nose. With rates unlikely to be this low in the next 0-60 month term, refinancing becomes less likely as a means to remove the PMI.
Which is the better loan option?
It depends. For all the things that have changed in the past few years, we’re finally back to normal. Mortgage loans are typically the largest household debt and are not one size fits all. If you’re likely to be relocating, needing a larger home, or needing a smaller home in the next few years, then the Conforming loan may be a better fit. If you’re in this home for 3+ years, FHA has become cool for the 700+ FICO crowd again.
Contact us for a personalized review of your financing needs.
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Taylor, Bean & Whitaker – FHA FAQ’s
The federal goverment suspended the third-largest issuer of FHA loans – Taylor, Bean, & Whitaker (TBW). They funded $17 billion in the first half of the year and estimates put 20,000-30,000 loan applications in limbo.
Here’s a quick attempt on the FAQ’s:
Q: Did you use Taylor, Bean & Whitaker?
No. Zero loans with us are impacting by this news.
Q: Taylor, Bean & Whitaker is my lender. What do I do now?
Nothing changes. The mortgage contract survives the shutdown of TBW’s future lending. Continue making your payments to the address provided on the dates required until you hear differently in writing.
Q: My loan is in underwriting / cleared to close / scheduled to close. Is everything fine?
No. TBW has no capability to fund a loan and that loan application is no longer advancing.
Q: I closed and funded my home purchase last week, am I okay?
Yes. Purchase loans that have funded are fine. Pay attention to your mail as you may be receiving notification via USPS mail regarding any future changes of payment address.
Q: I closed on a refinance with TBW last week and it was scheduled to fund this week, am I okay?
No. TBW is no longer funding mortgages. Refinances have a three-day right of recission between closing and funding. If you signed your paperwork at the title company on July 31, August 3, or August 4 your loan will not fund. You’d need to start a new FHA mortgage application.
Q: Okay, I get it–any loan in process is terminated. What do I do?
Start over. Question #1 in today’s market should be: “Do you fund your own loans at closing or does the end-lender?”
This not only influences the approval and underwriting control, but in today’s market (with 30,000 new FHA loans being resubmitted) it helps avoid a 60 day re-processing time.
Q: What’s the fastest way to get approved for a new FHA loan?
Contact us. We underwrite and fund our own FHA loans.
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FHA Rates v Conforming Rates
The mortgage rates for FHA and conforming loans have moved closer recently.
When we look at someone with perfect credit, single-family home and a 10% down payment, these loans are currently offering essentially the same rates in the low 5′s.
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FAQ on FHA: Condo Spot Loan Reserve Requirement
As FHA has become the defacto source for lower downpayment loans, we’re having condo questions that didn’t used to come up.
For FHA loans on condominiums, the condo association must have reserves that are equal to or greater than 10% of the current budgeted expenses for the year.
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Alameda County CA FHA Loan Limits 2009
For 2009 FHA Loans, the limit(s) for Alameda County, CA are:
- One-Unit: $ 625,500
- Two-Unit: $ 800,775
- Three-Unit: $ 967,950
- Four-Unit: $ 1,202,925
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Zoning
Areas that are designated by the local government where certain types of land uses are allowed. An area may be zoned for residential or commercial building.
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Zoning ordinances
Local laws that establish building codes and usage regulations for properties in a specified area.
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Zoning variance
When an exception is made in a zoning ordinance by the local government. These are granted on a case by cases basis.