5 Ways to Derail Your Loan Approval

MonorailYou’re getting ready to buy a home or refinance your home with your closing day around the corner when your mortgage originator contacts you to let you know there may be a problem.  Some issues may not revealed until days or sometimes weeks into a transaction.  Anytime documentation is provided to the mortgage company, it has the potential to raise more questions or require more documentation to satisfy underwriting guidelines.   Here are five situations to be aware of that can cause headaches during the loan process.

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What Determines How Much Home You Qualify to Buy: Part 1 – Your Payment

seesawPreapproval letters typically begin stating that a home buyer has been qualified or preapproved to buy a home priced at specific amount.  What it really boils down to is how much mortgage payment the home buyer qualifies for based on the borrowers monthly income and the debt to income ratio that is being allowed by the program guidelines.   Your proposed mortgage payment determines the loan amount that you’re qualified for.   Add the funds to cover your down payment less the closing cost and you’ll have the sales price.

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Paying Alimony? You May Want to Consider an FHA Insured Mortgage

Most mortgage originators know that if you have less than 10 payments remaining with alimony or child support payments, it may not have to be factored into your qualifying ratios (debt to income) as long as the payment doesn't impact your ability to pay the mortgage following closing.  A borrower needs to be well qualified with plenty of savings for an underwriter to support this guideline. 

But it's a little known nugget that lenders can choose to reduce alimony payments from the borrowers income instead of factoring it into the debt to income ratio utilizing an FHA insured loan.  Of course you would only do this if there is more than 10 alimony payments remaining.

"Since there are tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction from the borrower's gross income when calculating qualifying ratios, rather than treating it as a monthly obligation."

For example, Mr. John Doe has a great job earning $250,000 annually.  Due to his recent divorce, he has reduced savings and is now paying his ex-wife $3,500 per month in alimony.   He has about $1,200 in monthly debt plus his existing house payment of $3,200 per month, which he plans on selling after he settles into his new home.  If you factor in his alimony, this totals $7,900 of monthly obligations.  

He's hoping to use an FHA High Balance mortgage to buy a home in Seattle priced at $585,000 with 5% down payment (he likes that at 5%, vs. the minimum 3.5% down, he receives a slight reduction in the annual mortgage insurance).  

This morning's rate for this scenario is 4.375% (APR 5.001) which would create a total monthly mortgage payment of $3,645.00 (principal and interest 2,837.21, mortgage insurance of 299.83, and taxes and insurance of 577.96).

EDITORS NOTE: The above rate was quoted from July 2010 and is no longer valid. If you would like to have a current rate quote for FHA or any mortgage program for homes located in Washington, please click here.

John's monthly gross income is $20,833 (250,000/12).   His front end ratio is 17.5 (3645/20833) which is perfectly acceptable for qualifying with any mortgage scenario.   However, his back end ratio is 55.4 (7900+3645=11545/20833) if you treat his alimony as traditional debt as a conventional mortgage would.   Ideally, a back end ratio should be around 45, the limits can be pushed depending on the financial strength of the borrower and lender guidelines.

With FHA allowing alimony to be deducted from the gross income, the debt to income ratios are changed dramatically. 

$20,833 monthly gross income less the $3,500 alimony is $17,333. 

3645/17,333 creates a front end ratio (proposed mortgage payment divided by monthly gross income) of 21.03.

Monthly debt is reduced to $4,400 when the $3,500 alimony is not factored.  Add the proposed total monthly mortgage payment of $3,645 and the back end ratio is 46.41 (4,400+3,645=8,045/17,333).

Reducing the alimony from the gross income takes the debt to income ratio from 55.4 to 46.1 with an FHA insured mortgage.

If you need a mortgage for a home located in Washington state, please contact me.  I've been originating FHA, conventional and VA loans since April 2000 and Mortgage Master Service Corporation has been serving the Pacific Northwest for over 30 years!  

How Much Home Can I Afford?

This is a common question from first time home buyers.  When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:

  • What type of monthly mortgage payment would you be comfortable making?
  • How much money are you planning on using for a down payment and closing costs.

To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.

For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase.  She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000. 

NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.

Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000.  This is based on a 30 year fixed rate of 4.625%* (apr 4.790).

A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.

The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.

FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000.  This is based on a rate of 4.875% (apr 5.400).

If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.

One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable.  Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher.  If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage.   Once inflation happens, mortgage rates will be much higher.

If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.  

*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher.  Rates can and do change often.  Follow me on Twitter to see live rate quotes.

For your personal rate quote on a home located anywhere in Washington, click here.

Relocating to Washington State and Getting Preapproved for a Mortgage

When relocating to a new State, many want to have their next home purchased to avoid the inconvenience of having to move twice from temporary housing to their permanent home in Washington.  Lenders want to know that the borrower have employment and the ability to make their mortgage payments.

If you have a job waiting for you at your new location, often times a copy of your employment contract documenting the start date, salary and probability of continued employment.  A verification of employment will be performed either/or verbally or with a VOE (verification of employment) form to be completed by the new employer.  It’s also important to know that the new employment must be in the same line of work as the previous employment.

What if you’re self employed and moving your business out of area?  Unless your clients are able to follow you, such as an internet based business, it may be challenging to use your past income for qualifying as you are leaving your client base behind.

There various types of income may not impacted by relocating (subject to underwriting guidelines), such as:

  • Rental income
  • Retirement/Social Security
  • Alimony or Child Support
  • Notes receivable
  • Interest and dividends
  • Income from Trust

Other types of income may be considered as well…but if you’re planning on qualifying based on income from your “future” job–make sure you’re actually on pay-roll and do discuss your personal scenario with a qualified Mortgage Professional before you make any moves.

The Wild Cards of Refinancing

Jokers In years past, refinancing was a fairly simple task.  Homeowners would contact me wanting to restructure their mortgage to either reduce their monthly payments or perhaps to take equity to improve their home or pay off debts.  Back then, a 680 credit score was considered decent (anything over 720 was great) and people had a good idea of what their homes would appraise for and if they didn’t, I could usually determine a value by obtaining sales comps from a title insurance company.  It’s just not so anymore.  Refinancing can be trickier because there are “wild cards” involved that may not be revealed until you are deeper into the transaction.

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Form 4506: Not Just for Stated Income Loans Anymore

I like to check out how my readers found me via the terms that were entered into a search engine (such as Google or Yahoo).  Earlier this week, someone asked:

Why did I have to sign a form 4506?

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Debt to Income Ratios (aka DTI)

This is a follow up to the email I received asking several excellent questions.  I addressed what is required for a full doc loan in my previous post.   Now it’s time to answer Question #2:

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