Why I Don’t Like Stated Income Loans

March 31, 2007 by 11 Comments

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.   

Filed Under: Financial Planning, Mortgage, Predatory Lending, Refinance, Residential Purchase, Subprime Lending Tagged With: ,

My Biggest Fear

March 26, 2007 by 4 Comments

FearNext to snakes, spiders, deep water and falling down stairs (okay…I have a few phobias!)…and actually this is no laughing matter.   There is so much hype in the media right now about the subprime industry and home owners in trouble with 80/20 loans and interest only ARMs, etc.    Many people are contacting me to confirm they’re okay or to see if the need to refinance.   So far, none of them need to refi (but I’m glad they’re checking with me).  Either they’re planning on selling or their ARMs won’t be adjusting for a couple more years and they’re actually quite happy with payments once they step away from the fear factor.   These home owners with ARMs and/or 80/20 financing are prime targets for unsavory loan originators to scare them into a refinance (there are even ads on TV soliciting home owners to do so) when they don’t need to.   Costing them at least a couple thousand dollars in their equity and rewarding some loser with a commission they shouldn’t have.   

How do they do this?  For starters, the local title companies can provide list of home owners if they have financing through certain lenders (like New Century, for example), or if they financed within a certain time period with an ARM.   The lender may call you (ignoring if you’re on the DNC) or send you a letter stressing their "sincere concern" over your current mortgage scenario.   Please don’t buy into it.   

  1. Contact your Mortgage Planner if you have any concerns with your current mortgage.   Now may be a good time for a credit and mortgage review–you may not need to refinance (everyone’s situations vary).
  2. Get a second opinion if you feel you need one.   Ask a friend, co-worker or family member for a referral.   Most professional Mortgage Planners are happy to discuss your situation without running your credit.  (If your Mortgage Planner all ready ran your credit, you can provide your scores to the person you’re getting the second opinion from). 
  3. Do not do business with lenders who have to "cold call" for business.  Rely on either your past Mortgage Planner or get a referral. 

Bottom line, don’t panic.  The worst decisions are made when someone is being emotional and scared.   Lenders who are predatory prey on the emotions of scared people.    This type of loan originator is ultra smooth…could probably out-sell me (and I’m sure has) on my best day.  (I do not view my career as "sales").  Take a deep breath and do some homework.  Make the hoopla over subprime loans into a personal opportunity to review your credit and get your finances in order.   It will save you in the long run.   

With all this said, some people are in trouble…they are not the majority and regardless, it is unfortunate.  If you are in financial troubles or if you feel you may be near it, please do contact your Mortgage Professional (or get a referral) right away. 

Filed Under: Mortgage, Predatory Lending, Subprime Lending

Part 3: Subprime Mortgages and Band-Aids

March 21, 2007 by 2 Comments

Bandaid1_1 Most of the subprime mortgages I’ve originated have been for families who needed a "band aid" with their finances or credit.    Borrowers in a subprime situation tend to have troubled credit or finances due to either

  1. Circumstance.  Life events that have happened beyond their control.  For example, illness, loss of employment, divorce, etc.
  2. Habit.  Lack of financial discipline or responsibility.   History of the same behavior such as bounced checks, collections, late payments, etc.

The subprime mortgage is not intended to be "long term" financing.  It is temporary (often with a 2 or 3 year fixed payment period) and people with them need to be working on improving their financial situation so that when the prepayment penalty is over and their payment is about to adjust, i.e. that band aid is about to be ripped of their ouchie, the sting is not so bad. 

During the 2-3 commitment period of the subprime mortgage (there is often a prepayment penalty associated with these types of mortgages), I have encouraged my clients to work on improving their credit scores and making changes in how they spend and save money.   

Now is a great time to review your spending habits.  If you’re reading this now, you probably have a personal computer that came all ready equipped with programs like Quicken or Microsoft Money.  Begin by reviewing what you’re currently spending every day and decide where you can make better choices.    Do you absolutely need to have a double tall latte everyday?   Having a $3 coffee drink on your way to the office equals $780 per year!  (I’m only counting weekdays and one drink a day–if you enjoy an afternoon coffee break, the cost is of course, higher).   You should be able to notice spending that is not needed (need is different than want).   Creating and following a budget will greatly help you plan for your financial future.   Cutting back on luxury items, such as lattes or going out to lunch and dinner, will provide you with extra cash to pay down credit cards and other debts.   

Related posts:

Part 2:  Know Your Score

Part 1:  Do You Need to Be Concerned?

Filed Under: Subprime Lending

Don’t Refi Your Second Mortgage…Yet

March 20, 2007 by 4 Comments

Mpj040717200001This is the advice that I just gave one my clients who closed a loan with me in 2005 with (gasp) New Century Mortgage.   She was going through a transition in her life and she is not a "subprime" borrower, but a divorce can create subprime situation. What was her nasty rate that I provided her via New Century?   Here is her scenario:

  • 100% LTV using two mortgages (80/20).
  • 1st Mortgage is a 3 year fixed 5 year interest only with a rate in the mid 5% range with a three year prepayment penalty (not optional to waive).
  • 2nd Mortgage is a 30/15 in the mid 9% range.

Yesterday I sent out an email to my entire database of clients to provide information about the subprime mortgage industry.   Since her mortgage is with New Century, she was naturally concerned and called me.     While talking to her, she told me that she is in the process of refinancing her second mortgage to a 10 year fixed rate mortgage.    She just wants to lower the rate and pay it off–great intentions! 

Here’s the possible problem.   When you refinance two mortgages, if the second mortgage is not a "purchase money second mortgage" (the original mortgages from purchasing  your home) it is then priced as a "cash out refinance" even if at that transaction, no cash is received by the borrower.   This can really impact pricing on the first mortgage when it’s time to refinance.   

"Loan to value " is just one of the factors in pricing a rate for a mortgage.   With a cash out refinance, if your loan to value (new loan amount/value of home) is:

  • 70-80% LTV may equal 0.50% to fee (or approx. 0.125 – 0.250% to rate)
  • 80-90% LTV may equal 0.75% to fee (or approx.  0.325 – 0.625% to rate)

Here’s my advise for this client:

Her prepayment penalty will be over next summer and since she does want to stay in her home, I advised not refinance the second mortgage.    The refinance proposal from the credit union does provide a better interest rate and would shorten the term of her second mortgage to a 10 year over a 30 year amortized with a 15 year balloon, and it would increase her mortgage payment over $100 per month.  I suggested that she keep the current second mortgage and apply the $100 extra she’s willing to pay towards the principle of her existing second mortgage.   

Then, next year when her prepayment penalty is over, refinance both mortgages at that time and receive the best rate possible (non-cash out) for her new mortgage.  And reduces her closing costs to one mortgage next year instead of closing a refi for the second mortgage this year and again for refinancing the two mortgages next year.

Alas…something good to come out of contacting my clients about the current subprime scenario!

Filed Under: Adjustable Rate Mortgage (ARM), Debt Restructuring, Refinance, Subprime Lending

A Real Estate Agent’s Guide for Subprime Buyers

March 19, 2007 by 2 Comments

Mpj040923700001Unless you’ve just been rescued from a deserted island, you have heard the news about what’s going on in the subprime mortgage industry.   It’s not a pretty site and in fact, it’s getting dicier every day with Alt-A lending (not quite subprime lending…it’s more of the stated income and 80/20 types of loans) tightening up, many people you helped find homes for during the past couple years no longer qualify for a mortgage.   

For example, on the afternoon of Friday, March 9th, I received a quote for a client with a mid score of 750 who needed an 80/20 mortgage stated income.   I was planning on brokering to Greenpoint Mortgage.   That very evening, I received an email stating that Greenpoint Mortgage is no longer doing ANY 80/20 mortgages.   Greenpoint Mortgage is NOT a subprime lender.   They are more along the lines of "alt-a" (not quite "conforming").  I had to contact the gentleman I had sent an email to hours earlier to tell him that I no longer had a mortgage program for him. 

There are worse stories surfacing as well.   When New Century Mortgage, one of the nations largest subprime lenders and a poster-child for the subprime mess, could no longer do fundings, many potential home buyers were at the funding stage of their mortgage…with no funds and no mortgage.    Yes, it’s possible if you have a subprime buyer, you may get all the way to closing only to have the lender not able to fund the mortgage.   

What should you do?

1.  Ask your potential home buyer if they have a subprime/alt-a mortgage.   Some signs might include:

  • 80/20 Financing (what does the preapproval letter say about loan-to-value?)
  • Stated income
  • Prepayment penalty (you can determine this on the Federal Truth In Lending, your buyer may not know)

2)  Ask the Loan Originator if the lender they are working with is subprime or alternative.   Even traditional "a paper" lenders, such as Countrywide and Wells Fargo, have subprime divisions.   

So what if your buyer is subprime or using alternative (alt-a) type financing?

  • You may want to consider closing quickly.   Many programs are disappearing quickly (such as 80/20s and stated income).   Credit score requirements are being raised and underwriting guidelines are toughening up for these types of loans.   Some lenders may honor programs if the loans are locked…some may not have any choice.
  • You might have the buyer provide a reduced earnest money.  In the event of a worse case scenario, in case they lose the funds if their financing contingency is waived.

How about your clients who have closed using subprime 80/20 mortgages?  This could be an excellent time to reach out to them.   They may be hearing all of the bad press on the news and could be rightfully concerned.   

If your subprime clients have not worked on improving their credit since they obtained their mortgage 2-3 years ago, they could be in for a world of hurt when their mortgage is getting ready to adjust.   I strongly encourage you to have them contact their mortgage professional asap to have their credit reviewed to see if they should (1) refi now; (2) work on their credit and wait until their prepayment penalty is up; (3) do nothing…prepare to sale.

Filed Under: Real Estate Agents, Subprime Lending

Part 2: Know Your Credit Score

March 14, 2007 by 4 Comments

EDITORS NOTE: What is considered a “good score” has changed quite a bit since the subprime era.

Mpj040244300001

In Part 1 of the Subprime Series, you should have found your Note and contacted your Mortgage Planner.  The next step is to review your credit report.   I suggest having your Mortgage Planner pull a tri-merge report.  They may or may not charge a fee for the cost of the report (around $20).

Whats your mid-score?  Just last year, a score of 600 was an easy mortgage transaction (for subprime)…now the bar is raising due to all of the foreclosures.  Typically, your “mid score” is going to be how you’re judged by the mortgage companies.  With a tri-merge report, you should have 3 scores ranging from 350 – 850.   Your mid score is literally the number between the highest and lowest score.   680 and above is considered to be a good credit score.   720 and higher is excellent.

[Read more…]

Filed Under: Credit Scores and Reporting, Financial Planning, Subprime Lending

Another Option for People with Subprime Mortgages

March 13, 2007 by Leave a Comment

Dan Green did an excellent post today on…what else?   Subprime mortgages.   He suggest that subprime borrowers look at refinancing now (if they plan to not sell their home) instead of waiting until the prepayment period is over.    His thoughts, which are valid, are that there may not be products available in the future when the time is right for a person to refinance out of their subprime loan.    To read Dan’s post, click here. [Read more…]

Filed Under: Subprime Lending, Weblogs

Part 1: Do You Need to be Concerned?

March 11, 2007 by Leave a Comment

Mpj040060200001This is the beginning of my official "what to do if you have a subprime mortgage" series.  I truly want to help as many home owners as possible who have subprime loans get out a potential pickle. 

I’ve posted many warnings about the changes in the subprime market and lack of mortgages for consumers with credit scores under 620.   

The first step is…  determining IF you have a subprime mortgage.   The mortgages that are receiving a lot of attention in the press these days are 80/20 mortgages.   Not all are subprime.   

Here are a few questions to consider (you should dig out all the papers from  your last mortgage…this is important):

  1. Do you have a prepayment penalty (this will be on your Note* and disclosed on your final Truth in Lending).   If you do have a prepayment penalty, when is the penalty period over?   Some slick loan officers might have told you that it’s "only a penalty if you prepay more than 20% of the principle" or they might have called it something like a "commitment period"…dig out your Note and check it out.   
  2. How much time do you have before your rate is scheduled to adjust?  Again, this calls for you to dig out the Note* you signed at the escrow company when you obtained your last mortgage.   If you have less than one year before the rate adjust, please contact your Mortgage Planner for a credit review to make sure you’re on track.    Often times, the subprime mortgages are fixed for 2 or 3 years on the first mortgage.  If mortgage is subprime or not, please do check to see when your ARM (if you have a short term fixed rate) is scheduled to adjust.   
  3. How much will your payment adjust?  Your Note will show you what your interest rate is based on.   You may either have an ARM or a balloon payment with your mortgage.   If your mortgage is subprime, the adjustments to your payment are typically steep.   Caps (the limit on how much your rate can adjust) will be on the Note.
  4. If you’re unsure of questions, please contact your Mortgage Planner.  They can confirm whether or not your existing mortgage is "subprime".   Since you have your mortgage papers out of your filing cabinet and you have your Mortgage Planner on the phone, schedule an Annual Review of your mortgage to assess if it is still the right course for  you in light of the current market conditions.

So what if you do have a subprime mortgage?   In some ways, you might consider yourself lucky if you have taken steps to improve your credit and you can pay your debts on time you should be able to refinance when your prepay is up just fine. If times are tough and your mortgage and other bills are a struggle, you might be in for a rocky road with many of the mortgages that helped you buy your home no longer available and you should maybe consider steps such as budgeting and credit repair to help you be in a good position to refinance when the time is right with your mortgage.   (Actually, we should all budget and take care of our credit).

This is just the beginning of a series of posts to hopefully help families with subprime mortgages position themselves into permanent "a money" financing.  Watch for Part 2: (I’m not sure what it will be called, but I do know…it follows Part 1).

*Your Deed of Trust is recorded to secure the Note (promissory note).   The Note contains other details, such as prepayment penalties, than the Deed of Trust, which is recorded to become public record.   You should have received a copy of the Note (along with a stack of other papers) from the escrow company when you obtained your last mortgage.   Bottom line…dig out all of your papers and if you have to, contact your Mortgage Planner and provide it to them for review.   

Be proactive and responsible. Take the necessary steps to make sure you’re in a good place before your mortgage rate adjusts.

Filed Under: Subprime Lending
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