What Should a Preapproval Letter Contain?

April 21, 2010 by Leave a Comment

This isn’t the first time I’ve written about preapproval letters at The Mortgage Porter…however it has been a while and I would say that with all the changes in the mortgage industry, your preapproval letter is more important than ever.  Most Seattle area real estate agents will not accept an offer on a home that’s listed for sale without a bona fide preapproval letter.

Preapproval letters may vary in appearance and content from lender to lender.   Some mortgage companies may have different protocal for when a preapproval letter may be issued.   When I provide a preapproval letter, it means that I have a complete loan application, most likely with exception to the property address since the home buyer has not yet identified a home.   It also means that the home buyer (i.e. borrower) has provided me all the necessary documenation that supports or backs up the information that has been provided on the loan application, such as

  • income documenation (to make sure they qualify for the proposed montly mortgage payment)
  • assets (at minimum, enough to cover the down payment and closing costs)
  • credit report…everything seems to be based on your credit score from potential interest rates to what you qualify for.   This is something that we need to pull if you are interested in obtaining an actual preapproval.

A good preapproval letter should address all of these items so that the seller and the real estate agents know how qualified the home buyer is.  This is done in a manner in which not to violate the buyers privacy.  For example, a seller or real estate agents should not see the buyers income, assets and credit scores.  If a buyer wants to share that information with someone other than their mortgage professional, it is up to them!   Instead, the preapproval letter will address that these items have been reviewed and are acceptable. 

For example, I might include something like this in a preapproval letter:

This preapproval is due to your job stability and excellent credit.  Funds to close this transaction are from your personal savings and a seller contribution in the amount of $5,000.

You can see that I have addressed income, assets and credit in this paragraph. 

My preapproval letter also includes program type, the sales price and loan amount.  Every so often I’ll have a real estate agent want me to leave the sales price blank.  This is something that we can do IF the borrower has substantial cash reserves.  I’ve found that some home buyers would rather not have their preapproval letters written this way…and I’m happy to provide several preapproval letters with staggered sales prices (as long as the borrower has documented the funds for down payment and closing costs).

You may find a total mortgage payment on a preapproval letter.  This is because borrowers are qualified by their mortgage payment since loans have a certain allowed debt to income ratio.  If a borrower is a little pushed with their ratios and they find a home within the sales price and loan amount they are preapproved for, but the property taxes or home owners insurance are higher than estimated or mortgage rates climb higher than what they were approved at, you no longer have a preapproved buyer.   Whether or not your mortgage originator includes what payment you’re preapproved for, it’s important to ask.

Any conditions to the loan approval should be included on the preapproval letter.  Standard conditions on our preapproval letter may include:

  • satisfactory purchase and sales agreement
  • satisfactory title commitment 
  • subject to appraisal 
  • subject to changes to financial situation as disclosed on the loan application (i.e. changes in your employment, debts or assets may jeopardize your preapproval status).

Preapproval letters may also have an expiration date.  Before our current lending environment, preapproval letters would be valid for a longer period of time.  Now credit reports and other supporting documentation “expire” earlier.  Should your preapproval letter expire, they’re typically easy to update by just supplying your latest supporting documentation (paystub, bank statement, etc). 

The letter should have a date and be signed by whomever prepared the letter with their contact information. 

When I prepare a preapproval letter for someone who’s buying a home located in Washington, at the very least, they have gone through preliminary underwriting.  If a mortgage originator has not obtained your documentation or if you have not completed a loan application, you are probably just prequalified and not preapproved.

With HUD’s new Good Faith Estimate, unless you have a property address, you may not receive a good faith estimate with your preapproval letter.  This is a glitch with RESPA that I hope HUD finds a way to correct.  Even HUD admits that if a mortgage professional provides a good faith estimate without a property address, they’re doing so at great risk (due to the financial liabilities packed in the new Good Faith Estimate).   Your mortgage professional can provide you with a “work sheet” until you have a transaction (property address).

If you are shopping for a home anywhere in Washington state, I’m happy to help you become preapproved. 

Filed Under: Real Estate Agents, Residential Purchase Tagged With: , ,

15 Days Remaining for the Home Buyer Tax Credit

April 15, 2010 by Leave a Comment

NOTE: this is a post from 2010 and this tax credit is no longer available.

If you are planning on taking advantage of the home buyer tax credit, either as a first time home buyer or a "repeat" home buyer (aka "long time resident"), you have fifteen days to be in a binding sales contract with mutual acceptance.    This means that both you and the seller have ironed out the negotiations which can sometimes take a few days to agree on…so in reality, you probably have less than 15 days unless you submit the "perfect" offer to the seller and they decide to accept it with no counter offers.

If you are hoping to claim the home buyer tax credit, you should check in with your mortgage professional to make sure that your preapproval is still valid.  In the Seattle-Bellevue area, listing agents and sellers expect a preapproval letter to accompany the purchase and sale agreement before they will consider the offer. 

Preapproval letters may expire if your paystubs, bank statements or credit report are outdated.   The terms stated on the preapproval letter should match with the terms of the offer being presented to the seller.  Mortgage rates have been volatile and if your debt to income ratios were "pushed" to the limit, you may or may not be qualifed for what you once were.

If your offer is countered past April 30, 2010 because you didn't have all your ducks in a row with your lender, you may not qualify for the home buyer tax credit.

And before you try to get into a mutual contract before the deadline–it's a good idea to make sure that you actually qualify for the tax credit.  

You may be disqualified from the home buyer tax credit if:

  • the government has deemed you make too much money–modified adjusted gross incomes up to $125,000 for a single taxpayer, or $225,000 joint, qualify for the full credit.  Those with MAGI up to $145,000 for a single taxpayer   and $245,000 joint qualify for reduced credit.
  • if the purchase price is over $800,000 (better write that offer for $799,950 if your income qualifies).
  • if the home being purchased is not going to be your primary residence.
  • family members are not eligible (you cannot buy the home ancestors or dependents)
  • if the contract is accepted after April 30, 2010
  • if the transaction is closing after June 30, 2010

Remember, I'm your mortgage expert for homes located in Washington.  I am not a tax expert–please consult your CPA or tax advisor for more information.

Filed Under: Current Affairs, First Time Home Buyer, Legislation, Residential Purchase

Did You Know that FHA Mortgages are Assumable?

April 14, 2010 by 2 Comments

One benefit of FHA insured mortgages is that they are assumable to qualified buyers.  This means that if you have an FHA insured mortgage at today’s low rates and you’re selling your home during a higher mortgage rate environment, being able to offer a lower rate to potential buyers could provide a distinct advantage over other competing listings. [Read more…]

Filed Under: FHA, First Time Home Buyer, Residential Purchase Tagged With: , ,

Why It Pays to Get Preapproved Early: You May Think You Know Your Credit Score

April 7, 2010 by Leave a Comment

I recently met with a couple who had relocated to the Seattle area and were ready to make an offer on a home.  They’re very qualified with their income stability and enough savings to put a twenty percent down payment on their next home.  What surprised them was the credit report.  [Read more…]

Filed Under: Credit Scores and Reporting, Refinance, Residential Purchase Tagged With: ,

Gifts from the Bank of Mom and Dad – Part 2: Conventional Financing

March 12, 2010 by 2 Comments

Often times when gifts from family members are involved, borrowers my opt to use FHA financing since the guidelines are (currently) more flexible than conventional with regards to gifts.   With FHA, a gift from a family member can go towards to borrowers minimum required investment with conventional financing, it cannot.

Here’s an example.  Let’s say we have a sales price of $265,000 with 10% down payment creating a loan amount of $238,500.  Once you factor in estimated closing costs of $2,400 and and prepaids/reserves of $3,100; the amount due at closing is roughly $32,000 (10% down = $26,500 + $2,400 + $3,100).   The borrowers also have a $5,000 contribution towards closing costs from the seller.

At this loan to value, with conventional financing requires that the borrower invests a minimum of 5% of their own personal funds into the transaction.  Unlike FHA, these funds cannot be gifted from the family members.   NOTE: if the gift is 20% down or more, the 5% rule for conventional financing does not apply (the whole down payment can be gifted).

Staying with our example, this means that the borrower must contribute 5% of $265,000 of their “seasoned” funds = $13,250.

With the amount due at closing at $32,000, the borrower must contribute at least $13,250 (5% of the sales price) of their own funds towards the $32,000 (10% down payment).  This leaves $18,750 remaining “due at closing”.   The borrowers earnest money check (if sourced – meaning documented as being their own funds) can count towards the 5% investment requirement and so can deposits with the mortgage company.   For example, the our borrowers submitted an earnest money check in the amount of $5,000 with their purchase and sales agreement, they would have $8,250 remaining to invest into the transaction of the 5% requirement ($13,250 – $5,000 = $8,250).

Once the borrower meets the 5% down payment, the gift and any seller credits can be applied towards the transaction.   A seller contribution can only go towards allowable closing costs and prepaids.  With this scenario, that totals $5,500 ($2,400 + $3,100).  The seller cannot contribute more than $5,500 (actual closing costs and prepaids).  

Unlike a seller contribution, the gift from parents can be applied towards down payment or closing costs/prepaids, once the borrower’s 5% investment is met.  If your gift from the parents is larger than the remaining amount due at closing, you can either reduce your loan amount or not use the entire gift.  NOTE:  Your parents may want to check with tax adviser regarding possible tax implications with gifting funds.

With FHA financing, their is also a minimum required investment from the borrower, which is currently 3.5% of the sales price.  A gift from parents CAN be applied towards the borrowers minimum required investment (the 3.5%).

When parents provide a gift with conventional or FHA financing, they need to be prepared to provide documentation of where the funds came from.  They will sign a gift letter and provide a recent bank statement showing that the funds are available.  There also needs to be a “paper trail” documenting the transfer of the gift funds (photo copy EVERYTHING–you’re better off having too much paper work to provide your mortgage originator than not enough).

If you have questions about financing a home located in Washington State, please contact me, I’m happy to help!  We have both FHA and conventional programs available.

Related post:  Gifts from the Bank of Mom and Dad – Part 1: FHA

Filed Under: FHA, Residential Purchase Tagged With: , ,

FHA Flips for Flipped Homes (Some Restrictions Apply)

March 11, 2010 by Leave a Comment

Mortgageporterhouse

UPDATE: HUD HAS EXTENDED THIS WAIVER THROUGH DECEMBER 2014.  Information in this post from March 2010 may be outdated – as are many blog posts about mortgages (thanks to our ever changing guidelines).

I recently shared with you some of the upcoming changes to FHA insured loans that were addressed in a letter from HUD’s David Stevens.  In this letter, he reminds readers that FHA has recently “waived the regulation that prohibits the use of FHA financing to purchase properties that are being resold within 90 days of previous acquisition”.

Due to previous FHA guidelines, investors who purchased homes to renovate and resale in a short period of time (90 days), would not be able to accept an offer from an FHA buyer.  They were limited to cash buyers or those who qualified with conventional financing.  From Stevens:

“During this period of high foreclosures, FHA wants to encourage investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes for homebuyers.  Our aim is to help stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high.  The waiver is applicable to all properties being resold within the 90-day period acquisition and is not limited to foreclosed properties.”

The waiver takes effective February 1, 2010 and not every flipped home will qualify.  Per the Waiver of Requirements:

  • All transactions must be arms-length with no identity of interest between buyer and seller or other parties participating in the sales transaction.
  • If the sales price of the property is 20% or more above the seller’s acquisition cost be prepared for extra scrutiny.  A second appraisal will be likely required as well as an inspection ordered by the lender.

The waiver is set to expire one year, unless it is extended or withdrawn from the Commissioner.   More information is expected to follow from a HUD Mortgagee Letter.

Currently, the FHA loan limits for single family residences in King, Pierce and Snohomish counties is $567,500.   FHA mortgage insurance is set to increase on case numbers issued April 5, 2010 and later.  And this summer, the amount a seller can contribute to allowable closing costs will be reduced from 6% to 3%.

I won’t mention that the Home Buyer Tax Credit is expiring in 50 days on April 30, 2010 (oops…guess I just did)!

If you would like a rate quote for an FHA insured mortgage for homes located anywhere in Washington, please click here. I have been originating FHA mortgages at Mortgage Master Service Corporation since April 2000 and I’m happy to help you.

Filed Under: FHA, Residential Purchase

Claiming Your Home Buyer Tax Credit

January 28, 2010 by Leave a Comment

April 15th will be here before we know it and many are preparing for filing their income tax returns.  If you are planning on claiming the home buyer tax credit (up to $8,000 for a first time home buyer or $6,500 for a repeat/long-time resident home buyer) there are some things you need to know as far as what the IRS will require.

First of all, you will not be able to e-file if you're claiming the home buyer taxUnclesam credit.  This is because the IRS is requiring supporting documentation due to all the fraud that transpired previously with the first time home buyer tax credit.  So along with Form 5405, you may also need to send the following when you submit your return to the IRS:

  • a copy of your HUD-1 Settlement Statement with signatures of both parties (your autographs and the Seller's).  In Washington State, this is something you receive from your escrow company.

If you're claiming the tax credit as a "long time resident" home buyer (meaning you've owned and occupied your previous residence for any 5 consecutive year period during the 8 year period ending on the purchase date of your new home), in addition the the Settlement Statement, you will also need to provide the IRS one of the following:

  • Form 1098 or Mortgage Interest Statement
  • Property Tax Records
  • Home owner insurance records

The IRS is requiring this documentation to prove you owned and occupied your home for a minimum of five out of eight years.  And per their instructions:

"These records should be for 5 consecutive years of the 8 year period ending on the purchase date of the new home."

Be sure to review the IRS Instructions for Form 5405 for more information and please consult with your tax professional to make sure you qualify.  My specialty is helping Washington State residents with their residential mortgage needs…not income taxes!

If you are considering buying a home and taking advantage of the first time or repeat (long time resident) home buyer tax, you only have about three months left.   You must have a binding contract (signed purchase and sales agreement) by April 30, 2010 which must close by June 30, 2010.

Filed Under: First Time Home Buyer, Residential Purchase

100 Days Remaining for the Home Buyer Tax Credit (and my 1000th Post)

January 20, 2010 by Leave a Comment

Fthbtax My apologies for the home buyer tax credit clock I've added to the left side bar of my blog ticking away the time remaining for home buyers tax credit.  It's not my style, I don't like to pressure folks and I really don't like telling someone that they missed an opportunity. 

Whether you are for or against our home buyer tax credit it is something that many home buyers, first time and "move-up" home buyers, will take advantage of.   Unlike the first tax credit that was passed where the home buyer had to pay it back over 15 years, this is a "tax credit".  This credit repaid if you sell your home within three years. 

The available tax credit for first time home buyers (those who have not owned a home in the last 36 months) is up to $8,000.   For the "move-up" or "long-time resident" (you don't have to be buying a bigger home to qualify), the available tax credit is up $6,500.  The long-time resident is defined as someone who has owned their home as their primary residence for the last three out of five consecutive years.  The tax credit for both first time and long time residents is for the purchase of a primary residence (owner occupied).

Income limits were raised for transactions closing after November 6, 2009 to up to $125,000 modified adjusted gross income (MAGI) for taxpayers and $225,000 for joint filers.  The credit is reduced up to those with MAGI above $145,000 for single and $245,000 for joint.

Homes with a sales price of over $800,000 are not eligible (too bad–the Jumbo market needs all the help it can get). 

In order to qualify for the tax credit, home buyers must be in contract to purchase a home by April 30, 2010 (100 days away as of today)* with a closing date no later than June 30, 2010 (no summer vacations for escrow officers in June).   Home buyers will need to file IRS Form 5405 and be sure to include a copy of their HUD-1 Settlement Statement.

Members of our Armed Forces serving outside of the United States have been granted an extra year for the tax credit.  They must be in contract by April 30, 2011 and close prior to June 30, 2011.

Check with your tax advisor for more information.

Special note: this is my 1000th article posted at Mortgage Porter!  Thanks again for your continued support and readership. 

Filed Under: First Time Home Buyer, Legislation, Real Estate, Residential Purchase, Weblogs
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