Many of you read the article in Crain’s Chicago stating a deal fell apart at the closing table due to the lender rejecting the Chicago Northwest Side Ordinance on title. I want to set the record straight on a few points.
Fannie Mae
The problem lies with Fannie Mae. A lender issuing a low down payment loan to a buyer will ultimately sell that loan to Fannie. The lender could still issue the loan and hold the mortgage, but very few can or will. Fannie told a lender they would not approve any loan with a right of first refusal on title, and that news was shared in the article. However, I reviewed the Fannie rules and they DO allow a mortgage with a right of first refusal on title, IF there is an endorsement from the title company.
Title Company Endorsement
Title companies have started issuing endorsements for the ordinance. I reviewed the Chicago Title endorsement with experienced lenders, who then shared it with their contacts at Fannie. They were informed the endorsement should allow Fannie to approve the mortgage. So low down payment loans are not dead with the ordinance zone, but please verify the title company is issuing an endorsement and the lender has submitted the endorsement to underwriting for approval ahead of closing.
There are two negatives with the endorsement.
To issue the endorsement, title companies must perform their own underwriting of the ordinance. The ordinance does not grant the City of Chicago Department of Housing the authority to grant an approval letter or closing letter. Any “approval” from DoH will not be recognized. The title company will require an exhaustive list of documents from the seller, including proof of delivery of the Notice of Third Party Purchaser, even if the DoH didn’t require it. The risk lies in verifying no tenant can file suit, as permitted by the ordinance, to seek to block or overturn the sale. The seller will need to sign an indemnification to the title company, including showing proof of financial assets to support the indemnification.
The endorsement is not free. Current title invoices are charging $500, plus $1 per thousand of coverage. For a $400,000 purchase, it will raise the closing costs $900.
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