Quick mortgage tip for self-employed and commissioned paid individuals

October 24, 2012 by 1 Comment

Earlier today I was having a conversation with a self-employed woman who just filed her 2011 taxes prior to the October extension deadline. She’s eager to buy a home in the greater Seattle area and her 2012 income shows a continued trend higher. She’s curious as to how quickly she can use her 2012 income for qualifying.

Typically for a self-employed or commissioned paid borrower,lenders want to see the last two years complete tax returns and will basically average the last two years net income assuming their income is steady or improving.

I advised her to file her 2012 taxes as soon as possible if she’s planning on using her 2012 income for qualifying. Not only will the 2012 tax returns need to be filed before a lender can use the income, most lenders will require a the tax returns to also be verified by the IRS.

Lenders use Form 4506 to obtain a tax transcript for several reasons, in addition to verifying taxes have been filed. The tax transcripts are a summary of the tax returns which reveal items such as income and deductions for a specific year. W2 salaried employees may be caught off guard if they claim a lot of work related deductions as an underwriter will most likely deduct those “expenses” from their gross income. Any conflicts between the what has been provided to the lender and what the IRS is reported must be addressed. 

During busier times for the IRS, such as April when income tax is due, it may take several weeks to obtain tax transcripts for that year. Even if the earliest my Seattle home buyer can file is at the beginning of February, she’ll at least have a beat the April rush.

So if you’re planning on buying a home in the beginning of the year and you need your 2012 income to qualify, file your taxes early. Chances are, your lender may not be able to close without being able to obtain your transcripts. 

If you’re considering buying or refinancing your home located in Washington state, I’m happy to help you!

Filed Under: Self-Employed, Underwriting and Qualifying Tagged With: , , , , ,

Changing jobs during the mortgage process

August 24, 2012 by 1 Comment

Sometimes an employment opportunity may become available while you’re in the process of buying a home or refinancing. Lenders are looking at a borrowers employment and income stability so depending on the type of field you’re in, a change of employment may or may not impact your loan approval. 

As long as you’re staying in the same line of work and if you have an annual salary, it probably won’t be an issue. The lender will probably require at least one pay stub (possibly more to document your income) from your new employer as well as a verification of income. If you have an employment letter or contract from the new employer, this can be helpful to provide the lender as well. With new employment, signing bonuses are not factored into the annual income however, they may be used towards the down payment or closing cost as your seasoned funds. 

If the new employment is not related to the same line of work, this may cause an issue with the loan approval as lenders are looking for two years of employment in the same or related field. If the income structure has changed, this may cause an issue as well unless it is to an annual salary. The underwriter may require a written letter explaining your employment history.

Moving from annual salaried income to a potentially flexible type of income may derail your loan approval. Self-employed, hourly income, bonus or commissioned income requires a two year history before a lender can use it for qualifying purposes.

Sometimes a promotion can impact loan approval if pay structure changes. For example, if a borrower was paid an annual salary and then receives a promotion which reduces the annual salary in exchange for a higher bonus or commission structure, the bonus or commission income cannot be used unless the borrower has been receiving that type of income for a minimum of two years. In this case, the new lower base salary (the “guaranteed” portion of the income) can be used, but not the “flexible” bonus type income. 

If you are considering a job change during the mortgage process, it’s crucial to inform your mortgage originator as soon as possible. Your loan application needs to be updated and the lender will be doing a verification of employment prior to funding your mortgage.  

If you’re considering buying or refinancing a home anywhere in Washington, I’m happy to help you!

Filed Under: Underwriting and Qualifying Tagged With: , , ,

Why getting a mortgage is more challenging today

August 15, 2012 by Leave a Comment

Typically when I hear media say that it’s difficult or impossible to get a mortgage, my hair stands up on the back of my neck. Often times, they’re misstating mortgage programs and saying something like “you need 30% down payment and 760 credit scores to buy a home” which simply is not true. However something that I cannot argue is that it is more challenging to go through the mortgage process today.

The process is tedious as borrowers are asked to provide more supporting documentation to prove they’re qualified for the mortgage. I’m not saying this is a bad thing. If you’re a long time reader of my blog, you know I was never a fan of stated income mortgages. However it’s to a point where home buyers and home owners wanting to refinance are having to do things like document and prove where a large deposit from a month ago came from…even if they have plenty of funds for the transaction. Underwriters are calling for additional documentation.

This is partly happening because of tougher guidelines to make up for the sins of the subprime era of mortgages. Loosey goosey underwriting guidelines allowed just about anyone to obtain a mortgage with no regard to if the borrower would actually be able to make the mortgage payments. 

What’s also impacting guidelines are buy backs. Fannie Mae and Freddie Mac are pushing back loans that are not performing back to the banks.  If that loan was not originated by a bank (for example, a correspondent lender, like us), the bank will try to force the originating lender to buy back that loan. This is one reason why many banks prefer working with correspondent lenders over mortgage brokers – correspondent lenders have skin in the game.  From Reuters:

Historically, Fannie Mae and Freddie Mac have taken banks at their word when they said loans were eligible. If later there were problems (because the borrower’s income was not properly verified, for example), then Fannie Mae and Freddie Mac could ask banks to buy back the mortgages at face value and absorb any losses.

Those repurchase requests are increasing as Fannie and Freddie apply more scrutiny. Both companies have hired more staff to comb through loans and determine which can be sold back to banks.

In the second quarter, outstanding repurchase requests at Fannie Mae grew by 20 percent to $14.6 billion from the first quarter, according to a filing last week.
 

In order for a bank or lender to have a fighting chance in not buying back the loan, they need to be able to show they had a complete and strong loan package with all of the borrowers supporting documentation to illustrate they qualified for the mortgage program.

You’re probably thinking that this sounds pretty fair. If a loan is not performing, then the originating lender should have to buy it back and deal with the losses. Banks are arguing that some loans that are not performing may be caused by the economy (loss of employment) and not due to the quality of the loan. A lender has to consider what are the odds the borrowers will be able to make the mortgage payments in the future.

As Fannie and Freddie increase scrutiny on mortgages and force more buy backs, banks will lend to fewer borrowers and toughen up guidelines. It’s already happening – just ask any HARP 2.0 borrower who’s trying to go back to their bank to refinance. Odds are, unless the refi has no pmi or lpmi, the bank may refuse it. Some banks have turned their backs on FHA streamlined refi’s as well.  Many banks are “cherry picking” mortgages…and with all the current volume, they can easily afford to. 

NOTE: If your bank has turned down your HARP 2.0 or FHA streamlined refinance on a home located anywhere in Washington, I’d love to see if I can help you. We work with several lenders who offer HARP 2.0 mortgages – even if you have LPMI. We are also still doing FHA streamlined refinances on Washington homes as well. One of the benefits of working at a correspondent lender is that we have several lenders to work with – we are not limited to one set of programs and guidelines. Click here for a mortgage rate quote. Okay… commercial over.

Watch for guidelines to continue to become tougher and expect to be asked for more and more documentation from your lender if you are considering a mortgage… we still have the Consumer Financial Protection Bureau fine tuning “the ability to repay”.  More mortgage fun coming your way soon!

With a little patience and cooperation with providing requested documentation to your mortgage professional, you will survive the mortgage process with success.

Filed Under: Economy, Underwriting and Qualifying Tagged With: , , , , ,

How to Prepare for the Final Phase of the Mortgage Process: Underwriting

July 19, 2012 by Leave a Comment

You’ve completed a loan application and have provided your mortgage originator with your income and asset documents. You’re told your loan is being submitted to “underwriting”. During the stage, the information you’ve provided is being scrutinized by a person (the underwriter) to make sure that it meets your specific program guidelines and the investor/lender guidelines. 

Hopefully your mortgage originator has done a solid job with your application by addressing possible questions the underwriter may have and gathering supporting documentation. Even if your mortgage originator and you have prepared the perfect loan ap for the underwriter, additional items are often called for after the underwriters review. These additional items are referred to as “conditions” to the loan approval. 

Here are a few quick tips to help make this process a little smoother.

  • Save everything. If you’re a shredder, like me, it’s time to stop… at least until after your loan has funded. Keep your paystubs, bank statements, retirement and asset accounts – you will probably have to continue to provide updated information to the lender.
  • Be prepared to document where large deposits ($1000 or more) came from on your statements. This means providing deposit slips and/or copies of the cancelled checks.
  • Provide “all pages” of items requested unless otherwise instructed. If an underwriter sees that your bank statement shows 1 to 4 pages, and you’re missing the last page (even if it’s blank), you will be required to provide this. “All pages” also needs to be provided of your tax returns, divorce decrees, child support orders and other documentation if requested by the underwriter. Just providing pages you feel are purtinent may delay your loan approval.
  • Avoid moving funds around. You will need to show where the funds came from and just saying “can’t you see I have gazillions in this account” won’t cut it with the underwriter.
  • Do not apply for credit. This creates an “inquiry” on your credit report. Your credit report is checked prior to closing and, if you have a new inquiry on your credit report, you will have the opportunity of explaining this to the underwriter. If you do obtain new credit, your loan will need to be re-underwritten with the new debt — even if there is no payment due (such as 60 days same as cash, etc.)
  • Provide requested documents promptly. 
  • If you’re planning a vacation, let your mortgage originator know as soon as possible.

Quickly providing everything that is being requested will help avoid delays with the mortgage process. 

In my opinion, a professional Mortgage Originator will essentially “pre-underwrite”  you as they take your application. They know what questions to ask and what documentation to provide the underwriter.  This is much better than working with a mortgage originator who has little to no experience in closing transactions, which you will probably find at large banks or large internet lenders.

If you’re interested in getting preapproved for a mortgage on a home located anywhere in Washington, I’m happy to help you!

Filed Under: Underwriting and Qualifying Tagged With: , , , ,

HUD rescinds recent guidelines on collections and disputed accounts

June 19, 2012 by Leave a Comment

Earlier this year, HUD released Mortgagee Letter 2012-3 which featured tougher underwriting guidelines. This week they released ML 2012-10 which effective immediately recinds the guidelines that would impact:

  • paying off collections and judgements; and
  • disputed accounts

All other guidelines address in ML 2012-3, including those that address income of self employed borrowers, are still going into effect.

Per ML 2012-3, the old guidance (which is now the “effective” guidance per ML 2012-10) does not automatically require collections to be paid off however judgements do need to be satisfied and paid off.  Disputed accounts are to be referred to underwriting (and most likely will need to be removed from the credit report).

Again, we’ll need to see how banks and lenders treat this rescission of guidelines or if they opt to stick with the tougher requirements by creating their own underwriting overlays.

Filed Under: FHA, Underwriting and Qualifying

How co-signing on a debt impacts qualifying for a mortgage

June 13, 2012 by Leave a Comment

As a Licensed Mortgage Originator, I often see credit reports where the borrower has cosigned on a debt for a family member or friend.  You may be a parent co-signing on your child’s student loans to help them get a better rate, helping your brother buy a car by co-signing the lease or auto loan or perhaps co-signed on a family members mortgage so they can buy a home. They’re going to be responsible for the debt and making the payments and you’re helping them out. Often times, folks don’t realize how this good deed may impact them qualifying for a mortgage down the road. [Read more…]

Filed Under: Underwriting and Qualifying Tagged With: , , ,

FHA Underwriting Guidelines Tightening

April 13, 2012 by 2 Comments

UPDATE 6/19/2012: HUD has rescinded some of the guidelines issued in this Mortgagee Letter. Specifically those addressing collections and disputed accounts.

In late February, HUD released Mortgagee Letter 2012-3 with tougher guidelines for self-employed borrowers, disputed accounts and collections. Over the weekend, HUD amended the guidelines to have the disputed accounts and collections go into effect on July 1, 2012.  However the new guidelines for self employed borrowers went into effect for case numbers as of April 1, 2012.  

Here is a quick(?) 4-1-1 of the new guidelines:

Income documentation requirements for self-employed borrowers:

A P&L and Balance Sheet is required if more than a calendar quarter has elapsed since the date of most recent calendar or fiscal-year end tax return was filed by the borrower with no exceptions.

If income used to qualify the borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax returns obtained from the IRS are required.

NOTE: This is in addition to providing two years your most recent complete (all schedules) personal and business tax returns. Borrowers who are doing an FHA non-credit qualifying streamline refi may be exempt.

Disputed accounts on your credit report: 

When an account on your credit report shows as being disputed, the application will be referred to a DE underwriter for review unless:

  • The TOTAL oustanding balance of all disputed credit accounts or collections are less than $1000; and
  • Disputed credit accounts or collections are aged two years from the date of the last activity as indicated on the most recent credit report.

Disputed credit accounts or collections resulting from identity theft, credit card theft, or unathorized use, etc., will be excluded from the $1000 limit provided acceptable supporting documentation can be provided, such as a police report.

 

Disputes on authorized user accounts are also factored into the $1000 limit.

NOTE: Conventional financing has really cracked down on disputed accounts as well.

Collections:

If the total outstanding balance of all collection accounts is equal to or greater than $1000 the borrower must resolve the accounts (e.g. enter into payment arrangements with minimum three months verified payments) or paid off in full at time of or prior to closing. 

If the total outstanding balance is less than $1000, the borrower is not required to pay off the collection accounts as condition of the mortgage approval.

NOTE: If you're paying off collections, please consult with your mortgage originator before you do and remember to always obtain documentation to show your account is satisfied and paid in full.

If you're planning on paying down balances of disputed accounts and collections to reduce the accumulative balance to $1000, you can forget about it.  HUD says this is a no-go. 

But wait… there's more! 

As Washington is a community property state, if a non-purchasing spouse has outstanding collections and/or disputed accounts, the unpaid balances must be considered in the $1000 cumulative limit UNLESS documentation can be provided to document the debt incurred prior to the marriage – it's possible an attorney's opinion letter may be required stating the borrower was not responsible for that debt.

Medical collections are included (NOT excluded) from the $1000 cumulative limit. This is possibly the most surprising to me as FHA, in the past, has been more forgiving of medial debts. Not so anymore.  

 

Yet…I'm also reading in the FAQs that unpaid charge-offs are not factored into the $1000 accumulative limit. I find this interesting as lenders view charge-offs as collections. Although HUD might be okay with charge-off's, I would anticipate lender underwriting over-lays on this one.

Speaking of underwriting overlays, we still need to see how lenders will embrace the new guidelines. Although the disputed accounts and underwriting guidelines for collections have been delayed until July, it's quite possible some lenders might implement these guidelines earlier.

Stay tuned and get started on your preapproval for your mortgage EARLY.

If I can help you with a home located anywhere in Washington, please contact me.


 

Filed Under: FHA, Underwriting and Qualifying

How often will I have to supply documentation for a mortgage?

April 5, 2012 by 1 Comment

OnionI've often thought that the loan process for a borrower is similar to peeling an onion. At the very beginning stages, when a borrower is considering obtaining a mortgage and they discuss their scenario with their mortgage originator, they appear to be a smooth, shiny Walla Walla Sweet. As the process continues, more layers are removed as documentation is provided. Sometimes when several layers have been peeled away, you no longer have an onion or at least, not the one you originally started with. It's crucial that a mortgage originator takes an in-depth interview with their clients before they enter into a transaction (purchase or refinance) to make sure as much their financial information has been addresses as possible. There may be a significant difference between how a borrower views their financial scenario and what their supporting income and asset documents tell to an underwriter. 

Here are some of the stages that a borrower can expect to have documentation requested by their mortgage professional:

Preapproval. A preapproval is different than a "prequalification". When you're preapproved, expect to provide income/employment and asset documentation to support the information you've provided to your mortgage originator. The items that are requested may be standard or specific if the mortgage originator used an "automated underwriting system" (AUS).  NOTE: if you have not provided any supporting documentation to your mortgage originator, you probably have not been "preapproved".  It's possible that if it's been a while since your mortgage was preapproved, you may need to provide additional information (recent paystubs or bank statements, for example) to update your preapproval.

Processing. Once you have a bona fide transaction, your loan application is "in process". At this time, my Processor will review my clients file with a fine tooth comb to see if there's anything I may have missed. It's possible at this stage, that a borrower may be asked to provide additional documentation. Depending on the loan program, sometimes longer time periods are required (30 days of most income documents or two months most recent paystubs, for example). This is also the stage when IRS tax transcripts are pulled (from your signed 4506T) which may also trigger questions and the need for additional documentation. Our goal is to provide a solid file to our underwriters so the end result is less "conditions". 

When your appraisal comes in you will be required to sign disclosures acknowledging you received a copy of your appraisal. By the time you're done autographing all of your paperwork required in a mortgage transaction, you may feel like a very popular rock star.

Underwriting. Once we have a complete loan package with all of the supporting documents, the file is submitted to our underwriting department. Once again, the transaction is being closely reviewed to make sure the documentation provided is in-line with the program guidelines and lender overlays. Once we have preliminary approval from underwriting, it's normal to have some "conditions" which typically means…yep, you guessed it, providing more documentation or writing a letter explaining a specific circumstance (LOE). 

There are primarily two types of conditions from underwriting:

  • Prior to Doc: these items must be provided before loan documents can be prepared.
  • Prior to Funding (or Closing): these items will not hold up your loan documents being prepared and can be provided prior to your loan closing.

Prior to funding, your employment is re-verified and a soft pull on your credit report may be done to verify you do not have any new debts and that you are still employed. If there are changes to your loan application (new debt or employment) be prepare to provide more documentation. If you've made changes to your application (debts, assets, income or employment) during the transaction – you must notify your mortgage originator. You're signing a "final" loan application at closing which needs to reflect your financial scenario – if it does not, you may potentially be commiting fraud. In addition, when changes to an application are found at this late stage in the transaction, it's probable the closing will be delayed.

Every time a document is provided to underwriting for review, it's possible it may trigger a new condition.  For example, a bank statement may disclose large deposits, which will need to documented where the source of funds came from or it may show the borrower has bounced checks, which could require a written letter explaining why the NSF happened. 

Why all this documentation? Basically, it's thanks to recent years past with the mortgage meltdown and fraud. Providing everything that is requested by your mortgage professional will help expedite your transaction. 

The days of "stated income" loans are gone. There are some streamlined mortgages that allow for less documentation, such as an FHA streamlined refinance and HARP, depending on the automated underwriting response from Fannie or Freddie.   

If you're interested in getting preapproved for a mortgage for a home located anywhere in Washington State, I'm happy to help you. I have been helping Washington home owners at Mortgage Master Service Corporation buy and refinance since 2000.

Photo Credit: Doc Wert via Flickr

Filed Under: Underwriting and Qualifying Tagged With: ,
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