Why I Don’t Like Stated Income Loans

Let me start by saying, I prefer a “No Income” over a “Stated Income” loan.  If you Riskybusiness_2 have to “state” an income, you’re potentially setting yourself up for committing fraud.  A “no income” verified loan (where your income is blank on the loan application) does come with a slightly higher rate than a stated income loan, however, there are no questions about what is questionable…your income!

Recently, a home buyer contacted me for a second opinion on their good faith estimate.  They had just made an offer that was accepted on a home.  After reviewing his information, he revealed that the loan was stated income.   I did not have all of their documentation needed for self employed borrowers (2 years complete tax returns, for starters) since I was just looking at closing costs and the rate.   So I asked why they were going stated income.   Here is his actual response:

“Let’s just say it’s income we’re hoping to achieve, but higher than what is on our tax return.”

Does that sound a wee bit concerning to you?   For one, they are stating income they don’t make in order to qualify for a mortgage.  When  you’re self employed your income can vary quite easily.   What happens if they don’t make the income they “hope to achieve” and they cannot swing their new mortgage payment?   

I asked if his Loan Originator was going to have him sign a 4506 or 4506T.  These forms are sent to the IRS so the lender (and what ever company your loan is sold to) can verify the income you are stating on the loan application by accessing your tax transcripts directly from the IRS.

“I did ask [our LO] about that, and she said it’s basically a formality – that they don’t actually pull the tax return…it’s just put [the 4506 form] in the file.”

Often times, the 4506 may stay “in the file”.  However, if the borrower defaults on the loan, you can bet the first thing the lender will do is to grab the 4506 to compare what was stated on the loan application to the actual income reported to the IRS.   

 

“Since I certainly don’t plan on defaulting, I’m going trust [the LO] and the bank on this one. She’s got an interest in this as well!”

The LO certainly does have an interest in the loan.   She’s going to get paid and keep her real estate agent happy.   Stated income and no-income verifiers are very easy loans to do as compared to doing a full document loan for a self employed borrower where you have to review and average incomes for the past two years.   Yikes…the LO might actually have to pull out their calculator and do some hard math and go through someone’s tax returns.  Oh dear!

Let’s assume worse case scenario for this borrower who is all ready admittedly overstating income at what he hopes to achieve…what he suffers a loss with his business and and is not able to keep up with his mortgage?  As a self employed person,  your income and costs are not secure or stable.   This could quite easily happen to the best of people.  Now you’re in a mortgage that you could not afford to begin with because you had to over state lie about your income.   Should your mortgage go into default, will the LO who put you into this loan stand by you?  I doubt it.  Plus, she’ll probably state something like “I had no idea they didn’t make that income.”   She won’t go down holding the borrower’s hand in this case, far from it.

If you are considering a mortgage where you “state” your income on the loan application, you should know:

  • Stated income loans are not created to exaggerate your income so you can qualify for a mortgage.   
  • Your stated income should compare to what you have reported on your gross income tax returns.
  • Consider a “No Income Verified” loan vs. a “Stated Income”.  The difference to rate, with good credit, is often not that significant.   With no income stated, there are no figures to lie about.   You’re qualifying on credit and down payment alone.   
  • Don’t lose sight on whether or not you can actually afford the mortgage payment.    Qualifying for a mortgage does not mean that you should have the mortgage if you cannot make the payments.

Lying about your income, or anything on the loan application, is mortgage fraud.  There are many other types of documentation available so that borrowers do not need to go this route (unless it makes sense–ie they actually have the income).

Still thinking about stated income?  Watch this video from CBS.   

Friday’s Mortgage Rates

Ardell Ardell from Rain City Guide, asked me to post mortgage interest rates on Fridays.   If you’re interested, you can click here.

I’m an April Fool

Vows11This April Fools is my first anniversary with my husband, Rob.   We were married in St. Helena, California at Harvest Inn near Napa.   We were suppose to have an outdoor ceremony next to vineyards. However, due to rain (I guess it followed us) we were married indoors underneath an "exit" sign.   I was thankful Rob didn’t look up and read the sign.   He could have bolted for the door!

April Fools also marks my first day in the mortgage business.  I "retired" from fourteen years in title and escrow industry and began my mortgage career at Mortgage Master seven years ago.   I must admit, I was hesitant to become a Mortgage Planner.   In the title and escrow business, you typically spend an hour with the consumer towards the end of transaction when they’re signing.   Often times, the buyer or seller may be feeling pressure even under the most ideal transactions. Buying or selling a home is not something most people do everyday and there is a lot of money at stake. 

I also did not have the have the highest opinion of loan originators.   A majority of the borrowers that I would sign did not understand their loan program and would expect escrow to explain it (this needs to be done by the Loan Originator well before your signing loan documents).   

I have learned so much in these past seven years.   It’s incredible.   And of course, the industry continues to evolve and new programs and products emerge.   My father in law, Bob, is Chairman of Mortgage Master and retired in his young 70′s just a few years ago!   This is a wonderful career.  I’ve had the opportunity to help hundreds of families with buying homes, restructuring their mortgages and debts or financing their goals.   If I have my way, I’ll have my mortgage practice as long as Bob did (he still receives phone calls from clients).

I guess I take some pretty crazy leaps on the first day of April!   Maybe this year, I’ll try bungee jumping or sky diving?

Big Views from Queen Anne Townhome

NeelyAll the convenience of living in the city with the comforts of living on quiet street just blocks from the Queen Anne’s South Slope.

Booming views from the living, dining and the Master Suite.   You even get a 2 car garage IN THE CITY. 

Large gourmet kitchen featuring granite counter tops, stainless steel appliances and maple cabinets. 

Neely1This seller has all ready purchased their next home and would like to sell this one.   

If you or someone you know would like in Queen Anne neighborhood with a place to park your cars, this could be your next home! 

For more pictures and details about this property, click here.

Neely2 Offered at $875,000

MLS #270393303

3 Bedrooms/2.5 Bathrooms

This home is listed by John Blacksmith of Lake & Company.    Again, I’m not a real estate agent.  I’m just a Mortgage Planner helping out my client (the owner of this nice home).   If you are interested in financing for this property, please contact me!

The Importance of Good Signage

SkcarLast week, I sponsored Jillayne Schlicke’s class at the Seattle King County Association of Realtors on High Impact Blogs and Podcast.

I had a great time.  I thought I was just bringing in a few snacks for the hungry Realtors to keep their brains going during her course…little did I know she would call on me to help the class build their blogs.  It was fun.   What was not fun…was trying to find SKCAR’s office.   

I thought I had it all planned out.   The night before, I entered their address into the car I normally drive and the system mapped it all out.  Simple!   Except my husband decided to drive that car.  I entered the address again into our other car…and no luck!  Our Japenese navigation was fine, our Swedish nav–not!   No problem, I use to be in title insurance and I’m certain I can find their office.

It’s located off I-90 in Factoria–super easy from West Seattle, where I live.  I stopped off at the Factoria QFC for sandwhiches and drinks and proceed to where I think their office should be.   There is an office standing alone with what appears to be appartment buildings.   I don’t see any sign that says SKCAR or Realtor-anything.  The building has the logo above (I snapped the photo above with my Treo 650)…I thought it said IMI or 1001 building.   It just couldn’t be right.   So I do a u-turn and drive down 32nd SE in the oppositie direction until I realize this wasn’t right, either.

That’s when I pulled out my trusty old Treo 650 and hop on the internet to SKCAR’s website which has directions!   Come to find out, their office IS at the lone building I was originally at.   

Good thing I didn’t buy hot sandwhiches with all of my driving around!   Class was great and all is good (just a little more driving than necessary).

Hey SKCAR, how about some signage on the building (beyond the gold lettering on the glass front door)?

Almost a Duplex in West Hill Auburn

Modo1_4This West Hill Auburn home is almost a duplex with complete separate living quarters down stairs.   Pefect for guests or caring for extended family.  And plenty of parking with the carport and garage.

This home was virtually rebuilt in 2005 and features hardwood floors, slab granite counters, stainless steel appliances…I could go on and on!

The seller has all ready bought their next home and are getting ready to move.Modo3

You, or someone you know, can be enjoying taking in the Mt.  Rainier, Cascade and valley views from the expansive deck.   For more pictures and details about this home click here

  • Offered at $559,990 Modo2
  • MLS# 27039759
  • 5 Bedrooms/3 Bathrooms

This home is listed by Maureen Donhauser of Windermere West Campus.   I’m not a real estate agent…nor do I play one on TV.  I’m just a Mortgage Planner trying to help out my client.    If you need financing for this fine home, I am more than happy to help you.

The Low Down on Fannie Mae Flex

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Update: This is a classic example of the trouble with writing about mortgage programs…some are no longer available. When researching about mortgages on the internet, please be sure to check the date of the article.

With many of the zero down options tightening up, it's time to return to the mortgage programs that were popular a few years ago before the 80/20s were all the craze.   One such program worth considering is the Fannie Mae Flex (97 and 100).   This is truly a low down program offering either a minimum $500 borrower contribution or 3% flexible contribution.   

The Fannie Mae Flex allows for flexible sources of funds for closing costs and prepaids:

  • Borrowers own funds (including loans against a 401(k) account or cash-valued life insurance policy.
  • Gift or unsecured loan from a relative.
  • Grant from non-profit or employer.
  • Interested party contributions (to be applied to closing costs and prepaids) such as a Builder or Real Estate Agent.

The Flex program utilizes automated underwriting so minimum credit scores, reserves and qualifying ratios are determined by Desktop Underwriter

There are no income limitations, such as with My Community programs.   The program is limited to conforming loan limits (currently $417,000 for a single family dwelling).   

There is private mortgage insurance with this program.   However, with a credit score of 620 or higher, a borrower may qualify for LPMI (Lender Paid Mortgage Insurance).   The rate with LPMI may or may not pencil out, depending on the credit score and loan to value.   Also, private mortgage insurance is tax deductible this year if you meet income limitations.

Sorry folks, this program will not work for manufactured homes.

Currently, I'm helping a couple buy their first home with this program.   They are utilizing a gift from their parents for the down payment and the real estate company they are working with rebates part of the commission which will cover their closing costs (including a 1% discount towards their interest rate).   The couple will not have to dip too deep into their savings or 401(k).   The current interest rate for the 30 year fixed rate is in the low 6%s with a loan to value of 97%.   They will pretty much be getting into their first  home with the earnest money investment of approx. $2,500 (special thanks to Mom and Dad).

Here's a quick re-cap of the Fannie Mae Flex program:

  • Low down payment
  • Higher debt to income ratios allowed
  • Forgiving of credit scores

Remember, always check with your Mortgage Planner to see which strategy for your home financing best suites your personal needs.

Would You Like Your Mortgage Blended, Shaken or Stirred?

Mpj028975400001Many home owners have two mortgages on their properties.  A first mortgage and a second mortgage that may either be fixed or a home equity line of credit.    Do you know what your effective rate is?   Basically, this is if you factor in what your paying on both mortgages, and then figured out what your interest rate is on your payment. 

Here’s how to determine what your “blended rate” is:

  1. Take your current mortgage balances and multiply that times your interest rate.  This equals your interest expense.
  2. Add both mortgages interest expense together.
  3. Add both mortgage balances together.
  4. Divide the total interest expense by the total mortgage balances.   This provides you with your blended (of effective) interest rate of both mortgages.

Let’s run through this with real numbers:

  1. 1st Mortgage with a balance of $200,000 x 6.25% interest = $12,500.   2nd Mortgage with a balance of $50,000 x 8% interest = $4,000.
  2. $12,500 + $4,000 = Total interest expense of $16,500
  3. $200,000 + $50,000 = Total mortgage balances of $250,000
  4. $16,500 (total interest) divided by $250,000 (total mortgage balances) equals an blended rate of 6.6%.

This formula can be used on new or existing mortgage scenarios.   As you pay down your mortgages, the blended rate will change.  Especially if you’re paying extra towards a second mortgage with a higher rate.

Sometimes homeowners opt for a second mortgage instead of refinancing their first, hanging on to what they feel is a favorable rate.   This may be the best option, depending on if they feel they’re going to be coming into cash to pay off the higher interest rate second mortgage, or if they are disciplined enough to pay additional towards the principle on the second to reduce the term.   There may also be tax advantages for not refinancing the first mortgage as well (always check with your CPA).

If a borrower is getting a higher interest rate second mortgage because they don’t want to “touch” their first mortgage with a lower rate, but they do not have intentions or means of paying down or eliminating the second mortgage, reviewing what the actual effective rate or blended rate may be very well worth considering in order to determine what the mortgage strategy should be.

There are also many other factors to consider when selecting a mortgage such as how long one plans on retaining the property and what they predict their incomes will do in future, etc.    This is why it’s important to review your mortgage and financial goals with a Mortgage Planner.