Buying property in Chicago: a handy guide to financing

If you are interested in buying a property in Chicago it is important to be aware that it can be a minefield; if you are unaware of the market. However, the process can be easily simplified and less stressful by being prepared in advance. From mortgage application and the house-hunting process to the taxes involved; we have produced this guide to help navigate all eventualities.

Confirm your budget

When buying a property in Chicago ensure that you know how much you can realistically afford in advance.. This is one of not only the the first thing you should consider but it is also the important. From the outset, If you set a budget you can have a more realistic idea of what you can buy. This is also a very useful starting point for your property search.

In order to determine your budget and expenses when buying property in chicago the general rule is:

That you shouldn’t account for more than 28% of your gross monthly income before taxes,

Your total debt—including credit card and other loan payments—shouldn’t account for more than 36% of your income.

Take into account your down payment, housing price and additional homeownership expenses to determine how much you can actually afford.

How much cash is needed when buying property in Chicago?

In the summer of 2021, the average home in Chicago cost $340,000. Showing an increase from $375,000 in the spring of 2020. In contrast, the average rent in Chicago is $2,012. This average if reflective of certain districts that have rents as low as $1,000 and the more expensive ones with rent as high as $2,700.

Of course, that isn’t the complete picture. Home prices in Chicago’s 200 communities differ greatly from one neighborhood to the next, much like rent does.

Hidden costs to consider when buying a property in Chicago

Budgeting solely the PITI payment, which stands for principal, interest, real estate taxes, and insurance, is a typical error. Particularly in Chicago, homeownership comes with a lot of unspoken expenses.

When buying a property in Chicago, don’t just base your decision on the mortgage rate or asking price. Every year, hidden costs for Chicago homeowners amount to $10,400 on average. The following average expenditures for purchasing real estate in Chicago and house maintenance should be included in your budget.

Some of the major costs to consider per year after paying out the initial 2% to 5% of the purchase price.

General building maintenance $300 annually

Property insurance: $1,728 per year

Escrow account: 3 to 6 months’ worth of projected insurance and property tax bills (if less than 20% is paid down).

Property taxes: It is important to factor in that Chicago’s property taxes are double the US national average and among the highest in the country. Costs start from $3,820 per annum.

Repairs and upkeep for your home: 1% of its worth annually

Utilities: depending on size and type of property expect anything from $150 to $450 per month

The Mortgage Down Payment required when buying a property in Chicago

Your monthly mortgage payment and long-term borrowing costs are strongly influenced by how much down payment you can afford. In order to avoid paying mortgage insurance fees or Private Mortgage Insurance (PMI), you should ideally put down at least 20% when purchasing a home . If you make a smaller down payment, you will typically be responsible for this additional insurance charge each month in addition to potentially paying a higher interest rate.

Get your mortgage pre-approved

Once you have set your budget as to how much you are willing toi spend on buying a property in Chicago; you can pre-approved for your mortgage. This is crucial to complete before Chicago property seeking because it demonstrates to sellers that you are competent and serious. It also informs you of the maximum amount you ought to be able to borrow.
It is possible to obtain preapproval from the lender of your choosing. The lender you use for your last loan does not have to be the same. Make sure you are aware of the type of mortgage you want and whether you are eligible for grants for first-time homebuyers before beginning the preapproval process.

Requirements for getting a loan preapproval and buying a property in Chicago:

Basic Mortgage Requirements

You must present proof of sufficient assets, income, employment, and credit in order to be pre-approved.

Capacity to repay with a total debt-to-income ratio

This should be less than 36% or as much as 43% with a housing cost that doesn’t consume more than 28% of your gross income.

Income documentation

This can include anything that can prove that you have an income that can support the mortgage repayments; such as payslips and bank statements.

Proof of Assets

Evidence of assets sufficient to cover the down payment, closing charges, and reserves. The requirements will be dependent on the lending scheme and the down payment amount.

Sufficient FICO Score Rating

Mortgage Lenders utilize the FICO® Score to aid in making precise, dependable, and quick judgments regarding credit risk throughout the client lifecycle. Most lenders require you to have a score of 620 or more on the FICO scale. For an FHA loan, a credit score as low as 580 can be acceptable. Only those with great credit are eligible for the lowest rates.

Mortgage programs available for buying property in Chicago

Your credit rating aside with your ability to make a down payment, and how long you want to live in the house will all affect which loan program is ideal for you.

Adjustable Rate Mortgages

ARMs, or adjustable rate mortgages, start off with lower monthly payments and interest rates but are susceptible to change.

Conventional Loans

In comparison to government-backed loans, conventional loans provide better interest rates and more flexibility, although they do require a down payment of 3–5% (PMI requires less than 20% down).

FHA Loans

Chicago first-time buyers prefer FHA loans since they only need a 3.5% down payment (as opposed to the pricey upfront and ongoing mortgage insurance payments required with less than 20% down).

Fixed Rate Mortgages

Fixed-rate mortgages are the most popular and common option with a mortgage rate and payment that does not change.

Jumbo Mortgage

Jumbo loans, commonly referred to as jumbo mortgages, are a type of financing that exceeds the Federal Housing Finance Agency’s guidelines (FHFA).

USDA Loans

USDA Rural Development Loans help investors to buy or rent affordable housing; while supporting rural prosperity in Illinois.

VA Loans

With no down payment necessary, no mortgage insurance, and low funding costs, VA loans are available to qualified veterans, active-duty service members, and their families.

Incentives for first-time buyers when buying property in Chicago

If it has been three years or more since you last owned a property or you are purchasing your first property in Chicago; Homeownership may be within your grasp thanks to the several grants available.

Building Neighborhoods and Affordable Homes Program

If you are buying property in Chicago you you can obtain up to $60,000 in purchase assistance from the City’s Lots for Working Families program, In order to be eligible you must purchase a single-family house in one of five chosen communities.

Homebuyer Grant Program

Wintrust Community Bank’s program for first-time homebuyers. You may be eligible for down payment assistance of up to $2,000. You need to put down at least $1,000 and purchase a house outside of Chicago’s city borders in Cook County.

Illinois Housing Development Authority

The IHDA offers a number of subsidies, second mortgages, and loans for first-time homebuyers in Chicago. In addition to unique programs for homebuyers with student loan debt, these programs include forgiven down payment assistance loans, deed restrictions, and promissory notes for up to $40,000 in help.

Tax Smart

With savings of up to $2,000 annually, this Mortgage Credit Certificate offers a federal tax of 25% (buy loans) or 50% (rehab loans).

The Neighborhood Lending Home Purchase Program

For those finding it tough to get on the property ladder, this program offers mortgage loans for the purchase and or purchase and rehabilitation of a propert/ies. As part of the service, investors are supported via counselling and workshops in financial planning, budgeting, and credit repair. The eligibility of applicants is decided by the program based on the investors gross annual salary.