Mortgage Escrow Accounts: What are They and What Options Do I Have?

Mortgage Escrow Accounts: 

What are They and What Options Do I Have? 

The topic of "borrowing power" and questions surrounding "how much home I can buy" are raised almost immediately by prospective mortgage clients during our first conversation together ...  

It's understandable and natural.  They're excited and anxious.  That's especially true when the client is a first-time home buyer.  

Most are laser-focused.  Their ultimate goal is to find out:  What's the maximum amount of money I can borrow?  Or when purchasing, the question is often simply, "what price of home can I view"?  Again, that's understandable.

But while that information is certainly a portion of what must be discovered and explained during our conversations (and ultimately during the Pre-Qualification/Pre-Approval process), in actuality, it's not the dollar amount or Sales Price of homes they should be most concerned with.

No, their focus and concern should really be on the dollar amount or total Monthly Mortgage Payment they can qualify for.  A payment that will be dictated by several things, including:

• The Sales Price of the home being considered 
• Real Estate Taxes on that specific property 
• The cost of the Homeowner's Insurance coverage needed for that property 
• If Mortgage Insurance is needed in order to purchase the home  
• If an HOA Fee (Homeowners Association) comes with the specific property being considered

I've touched upon this important topic previously, most recently in my post, "How Buying in a Homeowners Association Can Affect Mortgage Approval and Monthly Payments".  But the crux of this post (and others I've written) center around:

How the choice and location of your home purchase 
can affect your "purchase power" and subsequently, 

your qualifying mortgage payment.  

This is truly the "bottom line" when seeking financing and Mortgage Approval.  It's a topic you and I will revisit often as you navigate your search for your home.  During your search, I'll make sure you have all the information you need to seek a home that's a good financial fit ... plus provide you sound guidance to help secure a successful Mortgage Approval.

Below you'll find a breakdown showing what comprises a Monthly Mortgage Payment and an explanation of each component:



The basic components: 
       1.  Principal and Interest Payment for the loan (P&I)
            Per the Consumers Financial Protection Bureau:  The principal is the amount you borrowed and have to pay back, and interest is what the Lender charges for lending you the money

       Escrow Accounts typically include these expenses:       
     2.  Real Estate Taxes  (1/12th of Annual Tax Bill)
       3.  Homeowners Insurance  (1/12th of Annual Premium)
       4.  Mortgage Insurance  (PMI or MIP, if applicable)

      *  Note:  Homeowners Association Fees: (HOA, 1/12th of Annual Fee, if applicable), are factored into the Housing Expense Consideration for Debt To Income Ratios (But NOT Escrowed), and are paid outside of the Mortgage - typically to a third party Management Company of Homeowners' Association.

Item numbers 2, 3, and 4:  Are items considered in the "Escrow".  In the State of Illinois, Escrow means "any account established by the mortgage lender in conjunction with a mortgage loan on a residence, into which the borrower is required to make regular periodic payments and out of which the lender pays the insurance and taxes on the property covered by the mortgage". (Illinois Mortgage Escrow Account Act)

Escrow payments are collected monthly by the Lender (or Mortgage Servicer) via the Monthly Mortgage Payment, then disbursed/paid-out after accruing in the Escrow Account.  

• Real Estate Taxes are paid out as tax installments become due during the year  
• Insurance is paid upon the annual anniversary/renewal date of the insurance policy

FYI regarding Insufficient Escrow Balances:  If the Escrow Balance is insufficient to make a payment, the Borrower is notified, and required to fund the Escrow with a lump sum payment ... or an acceptable increase in the  Monthly Escrow Payment to "catch up" on the shortage during the upcoming calendar year.

In most cases:  Mortgage Lenders REQUIRE that a Borrower maintains an Escrow Account when they do NOT have a 20% Down Payment (or hold  20% or more Equity in the financed home). 

For Borrowers financing in Illinois:  Once the Borrower has paid down their Mortgage Balance to 65% of the original loan amount, the Mortgage Lender is REQUIRED TO NOTIFY the Borrower of their Right to Terminate their Escrow Account ... provided that the Borrower is not in default on their Loan. 

The Borrower can choose to continue their Escrow Account if that serves their needs best.  But at this time, they also have the option of assuming the responsibility for payment of their Real Estate Taxes and Homeowners Insurance (and any HOA Fee) moving forward.  (This waiving of Escrow Account should/must be agreed to in writing for the Borrower's protection.)

For Borrowers making an initial Down Payment of 20% or more at the time of financing:  These Borrowers have the option of paying into an Escrow Account ... or paying Real Estate Taxes, Homeowners Insurance, and HOA Fees (if included) on their own.  This is agreed upon prior to Closing.  

For those Borrowers Refinancing their Mortgage:  Borrowers refinancing at 80% or less of Appraised Value have the same option to waive Escrow.  Again, this must be agreed upon prior to the Closing of their loan.

Escrow ... and how it fits into your home search, home buying, and future Mortgage Payment ... is just one of many things Borrowers need to know and understand.  It's important to seek and find a Loan Officer that will take the time to answer questions, fully explain your options, and help guide you through each step of your financing process.   

Then you will know upon completion of your Closing that you made informed sound decisions for yourself and financial future ...

* When in need of Mortgage info or service when buying a home in New Lenox - elsewhere in Chicagoland - IL & WI, contact me. I'll be happy to put my 40+ years of mortgage experience and expertise hard to work on your behalf.
I'm easily found at:

Gene Mundt

Mortgage Originator - NMLS #216987 - IL Lic. #031.0006220 - WI Licensed

American Portfolio Mortgage Corp.

NMLS #175656

Direct: 815.524.2280

Cell/Text: 708.921.6331

eFax: 815.524.2281

gmundt@goapmc.com

www.genemundt.com

   

Gene Mundt, Mortgage Originator, an Originator with 40+ years of mortgage experience, will offer you exemplary mortgage service and advice when seeking: 

Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago 

and the greater Chicagoland region, including: 

The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena, 

Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook, 

Romeoville, Naperville, etc.), DuPage County, the City of Chicago, 

Cook County, and elsewhere within IL & WI.

Referrals are Appreciated and Welcomed

Did You Do a Year-End Review of your Business?

Did You Do a Year-End Review

of your Business?

For many businesspersons, the end of one year and the beginning of the next signals the need for a year-end review.  And while I always conduct such a review of my own business, I typically don't share my findings publically.  

But this year, I'm going to speak of my results, as I was somewhat surprised by what I found during this annual exercise.  Very pleasantly surprised in one specific category.  

I definitely recognized that changes were taking place, as a many of the Chicagoland housing markets have healed to a good degree since the housing and economic downturn of the mid-2000's.  I was expecting that my business would reflect that better health.

But I truly had not realized that my personal business was subtly but steadily evolving throughout the past year to a noticeable degree too.  I guess I was "head-down-blinders-on" while concentrating on delivering Closings for my clients.  

One of the ways I categorize and analyze my database is by Loan Type ... that meaning Jumbo Loan, Conventional, FHA, VA, and "others" (in-house Portfolio).  While I had noted that the majority of my clients had held higher Credit Scores than those of previous years, I had not realized just how much those Scores had improved.  Or how those improvements had resulted in real change taking place throughout the year. 

The number of closed Conventional Loans reflected the starkest improvement and growth.  There was a marked shift away from FHA loans.  

Many of my clients that might have gone FHA previously had this year qualified for and taken advantage of the Fannie Mae "HomeReady" or the Freddie Mac "My Community" Program.  In many of these cases, my clients could qualify (and thus choose) between an FHA and HomeReady Loan.

As a refresher, here's a breakdown of the features of each kind of loan:

     FHA Requirements:

• 3.5% minimum Down Payment
• Typically has lower Credit Score Requirements
• Higher Monthly Mortgage Insurance payments
• When placing less than 10% Down, offers "life of loan" (30 years) Mortgage Insurance

     "HomeReady" (Conventional Loan) Requirements:  

•  3% minimum Down Payment
• Slightly higher Credit Score Requirements (than FHA)
• Lower Monthly Mortgage Insurance payments 
• MI payments that can, and typically do fall off after 8, 10, 12 years of payment when the original Loan is paid down to 78% - 80% of the initial Purchase Price

Note:  When considering the utilization of each the above, a study is performed.  Then comparisons are made showing the benefits of using the FHA Loan VS "HomeReady" Loan.  As in every case, Credit Scores, Down Payment amounts, Loan amounts, Debt-to-Income Ratios, can and do affect the cost of the Monthly Mortgage Insurance Payments.   

This side-by-side comparison between FHA and Conventional "HomeReady" or "My Community" loan is then presented to the Borrower for their consideration.  At this time, I also deliver my recommendations as to which Loan Program I project would lead to the most beneficial results.  

The criteria considered most heavily is: 

• Which loan type produces the highest likelihood of a successful Loan Closing? 
• Which loan type provides the best financial choice/results for my Borrowers ... both in the short-term and long-term?  

This comparison is also made:  

• Monthly Payment(s) VS Projected Stay in the Home  

What I typically found was that home buyers holding an FHA Loan and choosing to stay in their home were likely to pay more than those holding a "HomeReady/My Community" Loan ... due to their ongoing Monthly Mortgage Insurance payments (currently FHA's policy).

All of the things mentioned above contributed greatly to the shift I saw in my mortgage business.  And I felt good about that.

Why?

My clients, after receiving the facts regarding their individual financing scenario, clearly understood their choices well.  They had obviously listened, studied, and learned the pros and cons of each option presented to them.  That had resulted in them choosing the loan type they were most comfortable with and felt best represented a beneficial financial path for them moving forward.  Gotta love that ...

There were many positives to be found in my year-end review.  They're also encouraging signs as we enter 2018 ... for my clients, the overall economic outlook, and myself. 

Did you conduct a Year-End Review?  If so, what interesting trends and results did you find?

If in need of financing information/advice or thinking about buying or refinancing a home in the New Lenox - Will County/Chicagoland region, Illinois and Wisconsin ... contact me at your convenience at any of the following:

Gene Mundt

Mortgage Originator  -  NMLS #216987  -  IL Lic. 031.0006220  -  WI Lic. 216987

American Portfolio Mortgage Corp.

NMLS #175656

www.genemundt.com 

815.524.2280 

708.921.6331

gmundt@goapmc.com

Fax:  815.524.2281

   

Gene Mundt, Mortgage Originator, an Originator with 40+ years of mortgage experience, will offer you exemplary mortgage service and advice when seeking: 

Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago 

and the greater Chicagoland region, including: 

The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena, 

Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook, 

Romeoville, Naperville, etc.), DuPage County, the City of Chicago, 

Cook County, and elsewhere within IL & WI.

Your Referrals are Greatly Appreciated and Welcomed!

  

    

Is New Construction a Possibility? Here's How to Find Out ...

Is New Construction a Possibility?

Here's How to Find Out ...

There is a common thread running through much of the current real estate and economic news.  That thread connects, weaves, and embroiders a message regarding a severe inventory shortage found in many U.S. housing markets.  

I hear about the shortage of homes fairly often.  Many of my clients want to buy, but they're currently finding it extremely hard to find affordable well-maintained homes during their home searches.

The home inventory shortage is especially keen in the first-time homebuying and "step-up" markets.  That fact is something that's not going unnoticed by some U.S. homebuilders.  

A recent article found in NewHome Source reported (via Bloomberg Business) that, "newly constructed starter homes are coming back in a big way" and major builders
are building communities designed for Millennial first-time buyers".    

Yet another article, found in Professional Builder, states that  "... some home builders are responding to the challenge, and they’re succeeding."  And Tony Callahan, CEO and president of Callahan Consulting Group says, “There are just too many buyers (for starter homes) to ignore”.  Hopefully soon, even more builders will see the merit of concentrating on this underserved segment of the housing market.

It's important to point out:  Home buyers considering this type of home purchase need to understand that buying a new construction home is a "horse of a different color".  That meaning there are a few extra things they should know and do prior to signing on any Purchase Contract's dotted line.

So what are some of the ways that buying a new construction home is different from buying an existing home?

Below I provide some helpful information and timely tips that I believe will help new construction home buyers.  These tips are presented from my perspective as an Illinois - Wisconsin Mortgage Originator/Lender.  (Although many of the following tips pertain to other new construction housing markets as well, they're specifically aimed at the Chicagoland -Northern IL new construction housing market).

First, when considering the purchase of a new construction home: 

       A.  Seek the advice and guidance of a Realtor/Agent BEFORE entering into a Contract to Buy a new construction home
       B.  Consult with a Mortgage Lender PRIOR to listing your current home for sale. Learn and fully-understand ALL your financing capabilities and options

       Also:       

• Expect Home Builders to REQUIRE a small deposit to hold a lot, until a Contract can be agreed upon
• Be prepared to negotiate your best price first.  Then and only then, discuss home building options, credits, financing.  (Builders often try to intertwine these discussions) 
• Home Builders typically REQUIRE a deposit/payment be paid PRIOR to the start of construction (typically 10% of the final negotiated Purchase Price)
• If you are a buyer that currently owns a home ... and it has not sold yet, you will also have to consider the following prior to taking action:

       A.  How will you fund the deposit/down payment needed by the Home Builder?
       B.  If your home sells prior to your new construction completion, where will you live or stay until its completion and Closing Day?

       When negotiating your new construction home Sales Price with the Builder:  

          A.  How are offers of home features/options (such as Central Air, Appliances, Upgraded Flooring, etc.) handled?  Will you have a choice on how you pay for them or will they simply be added to the final Sales Price of the home?  
       B.  If it's the latter, you must be aware that you will be paying interest on those added option costs over the life term of your loan.

       Important: 

• Always compare the Builder's financing options to those of your preferred Mortgage Lender.  Do this regardless of any "discounts" or special offers connected to the Builder's financing.
• Ask questions and fully educate yourself regarding the future anticipated Real Estate Tax Bills on your home/subdivision.  

      A.  First, determine the Township (in IL) that the property lies in 
      B.  Contact the Township Assessor to learn what your taxes are projected to be for the first year tax bill and subsequent tax bills (showing completed construction).

      Regarding Financing Terms:

• Know and understand that Financing Terms for new construction are different than for existing homes.  Here's why:

       A.  For existing homes: Contracts for Closings are  typically written for 30 to 60 day periods
       B.  For New Construction:  Timelines can be for 90 to 180 days, or even longer.
       C.  Interest Rate Locks:  Typical Locks run for 60 days, but some Lenders offer 90-day Locks.  A smaller number of Lenders will offer "Extended Rate Locks" to cover a buyer/borrower from "start to finish/Closing" of a new home.  (Note: An Extended Rate Lock can be somewhat concerning, especially in times of volatile or rising Interest Rates) 

       Buyer Representation:  

• Protect Yourself.  Secure the services of a Buyer's Agent to assist you throughout your new construction home search, from beginning to end.  (A Buyer's Agent will represent YOUR interests during transactions with a Home Builder.  The Agent/Sales Representative within the model home represents the interest of the Builder) 
• Hire a Real Estate Attorney to provide you legal guidance prior to signing a Contract, or at minimum, be sure there is an Attorney Review Period within the Contract 
• Again, seek your Mortgage Lender's input and quote (for comparison with the Home Builder's mortgage lender's financing terms) Learn ALL the options available to you ... and the pros and cons of each.

New construction can be a viable option for purchase for some home buyers.  To fully understand if this type of home purchase is an option for you, you need to do some preliminary homework.

For buyers looking to buy in the New Lenox - Chicagoland/IL & WI region, please reach out with your questions.  I'll be happy to investigate and discuss all the options available to you and assist you in applying those options moving forward during your home financing and purchase.

* Hoping to Buy or Refinance a home in New Lenox or elsewhere in Chicagoland - IL - WI?

Contact me! I'll put my 40+ years of mortgage experience and expertise hard to work on your behalf.
I'm easily found at:

Gene Mundt

Mortgage Originator - NMLS #216987 - IL Lic. #031.0006220 - WI Licensed

American Portfolio Mortgage Corp.

NMLS #175656

Direct: 815.524.2280

Cell/Text: 708.921.6331

gmundt@goapmc.com

eFax: 815.524.2281

www.genemundt.com

   

Gene Mundt, Mortgage Originator, an Originator with 40+ years of mortgage experience, will offer you exemplary mortgage service and advice when seeking:
Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago
and the greater Chicagoland region, including:
The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena,
Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook,
Romeoville, Naperville, etc.), DuPage County, the City of Chicago,
Cook County, and elsewhere within IL & WI.

Your Referrals are Greatly Appreciated and Welcomed!