More Upcoming Changes to Underwriting

August 29, 2009 by 2 Comments

I originally wrote this post at Rain City Guide back in June of this year.  Fannie Maes tougher guidelines will go into effect in just a few days on September 1, 2009.  You can read the original post and comments by clicking here. 

Fannie Mae issued Announcement 09-19 amending some very basic underwriting guidelines that will not only impact conventional financing; it will apply to FHA insured loans that are underwriting using Fannie Mae’s DU.   You can read the entire announcement by clicking  here.

Here are some of the changes:

  • Credit documents will be valid for 90 days instead of the current 120 for existing construction.   The age of the document is measured from the date of the document to the date the Note is signed.
  • IRS Forms 4506 or 4506-T is required at application and at closing.  This is due to fraud (misrepresentation of income).
  • Age of appraisal is reduced from 6 months to 4 months.
  • Trailing Secondary Wage Earner Income is eliminated.   Now with a relocation, only the income of the spouse with actual employment may be considered.  Previously, it was possible to use the relocating spouse’s income from their employment prior to the relo without having an actual job.
  • Verbal Verification of Employment required within 10 days of signing the Note for employment income and within 30 days for self-employed income.  (Our company has always performed a verbal VOE prior to funding).
  • Stocks, bonds and mutual funds now valued at 70% instead of 100% to be used as reserves.   Due to market volatility, Fannie Mae is devaluing your portfolio.   This means that if you provide your mortgage originator with a stock, bond or mutual fund statement showing an ending balance of $10,000; the figure used for qualifying and on the application will be $7,000 (70% of the value).   Stock options and non-vested restricted stocks are no longer eligible to use as reserves.
  • Retirement accounts valued at 60% instead of 70% to be used as reserves.  

Fannie Mae’s effective dates are to follow…if the loan is manually underwritten, this applies to applications dated on or after September 1, 2009.   However, expect to see lenders and banks to adopt these guidelines early.

Filed Under: Fannie, Freddie and FHFA, Underwriting and Qualifying

Before You Negotiate the Patio Furniture into your Purchase and Sale Agreement

June 10, 2009 by 3 Comments

You find the home you've been waiting to write an offer on and the Seller has patio furniture (or a bbq,Patiofurnmtgporter riding lawnmower, furniture, etc.) that you'd like to make part of deal.  Perhaps the Seller's offering to leave you these items because it's convenient for them as well.  You and the seller include the items as part of your real estate purchase and sale agreement.  The agent is keen to include on the addendum that these items "have no value"…which may be true or it may be just to try to avoid having to deal with having a sales concession.

A sales concession is something that is not part of the real estate, such as cash, furniture, automobiles, decorator allowances, moving costs, or other "giveaways".  The value of the sales concession must be deducted from the sales price when calculating loan to values. 

For example, if you have a sales price of $200,000 and patio furniture valued at $3,000; the sales price the lender will use is $197,000 (200,000 – 3000).   Let's assume you're putting 10% down payment.   Without the sales concession, 10% down would be $20,000.   With the sales concession, 10% down is going to be a bit more:

The loan amount would be based on 90% of the adjusted sales price of $197,000: $177,300.  However the sales price, per the purchase and sales agreement is $200,000.  So the down payment would be $22,700: $200,000 less the loan amount $177,300.

The underwriter may (or may not) call for the concession item to be appraised or other supporting documentation to determine what the value is (or isn't)–even if the purchase and sale agreement states there is no value and the item was just left for convenience.  

It may sound silly or nit-picky to you…but would you buy the home at $200,000 without the concession?  The lender does not want the concession to be a part of what's factored into the financing.  If you have a significant down payment, this may not impact you.  Even with a 20% down payment, it could. 

20% down payment of $200,000 equals a loan amount of $160,000.  With a sales concession of $3,000; this can be treated a couple of ways:

  • Sales price is reduced by the concession to $197,000 (in the lenders eyes).  20% down payment based on 197,000 equals a loan amount of $157,600.  $157,600 less the actual contract sales price of $200,000 equals an actual down payment of $42,400 in order to have the mortgage still treated as an 80% loan to value with no private mortgage insurance or…

  • Sales price is still reduced to $197,000 and the loan amount remains $160,000.  Now the lender will treat this as mortgage with a loan to value of 81% which means: private mortgage insurance…even though the borrower is putting $40,000 down (20% of $200,000).

So you may want to think twice before you include items that are not real property in your purchase and sale agreement…unless you're putting a significant amount of funds towards your down payment or the items are truly worthless and you can prove it to the underwriter.

Filed Under: Residential Purchase, Underwriting and Qualifying

Relocating to Washington State and Getting Preapproved for a Mortgage

May 5, 2009 by 1 Comment

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.

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

Documentation for Self Employed or Commission Paid Borrowers

April 27, 2009 by 2 Comments

Sonia asks via commenting on a post at The Mortgage Porter:

“I’m a first time home buyer, but I am self employed I would like to be preapproved for a mortgage loan and want to know what paper work will be required by the bank…”

Self employed borrowers will most likely need to provide the following documentation:

  • Last two years complete (all schedules) tax returns for both business and personal including W2s or 1099s.
  • Year to day profit and loss statement.
  • Bank statements, asset accounts (all pages).  Be prepared to document you have enough funds to cover your down payment and closing costs at minimum.  You may have to show proof of having reserves (additional savings remaining after closing).

Self employed borrowers need to show at least two years of income for their business.  The borrowers often income is averaged over the past two years.  If the borrowers income shows a decline from the previous year, the lower income may be used and the self employed borrower should be prepared to explain why they are showing less income to the underwriter. 

These guidelines may also apply to:

  • People who are receive commission income that accounts for 25% or more of their annual income.
  • People who own 25% or more of the company they work for.
  • Independent contractors.

If you’re a commission paid sales person, you’ll need to provide your last two years tax returns as well and those un-reimbursed business expenses are factored against you. 

When a borrower has income that has the possibility of fluctuating, they need to be able to review a period of time (two years).   Underwriters are looking for trends with any borrower’s income. 

I recently met with a newly self-employed person who wanted to take advantage of the First Time Home Buyer Tax Credit.  She’s bought her business just shy of a year ago.  Even though it’s showing great profit right now; her first year tax returns report a loss (as many new businesses do).  She does not currently qualify for a mortgage.  After she has two years tax returns (track record) her income will still be averaged with the first year loss factored in. 

The days of “stated income” or “no income verified” are gone (so are many of the lenders who offered those products).  Be prepared to fully document your income and down payment.  You’re showing the lender you have the ability to pay the mortgage with your successful two year track record as a self employed person or commission paid sales person.

I’m happy to work with self-employed or commissioned paid borrowers. Click here if you would like a rate quote for a home located anywhere in Washington.

Filed Under: Refinance, Residential Purchase, Self-Employed, Underwriting and Qualifying

Why I’m Thankful I Don’t Work for a Bank or a Mortgage Broker

April 22, 2009 by Leave a Comment

Mortgage Master Service Corporation, my employer for the past nine years, is a Correspondent Lender–which is kind of like a blend of a bank and a broker.  I think it's the best of both worlds because like a broker, we have the ability to select which bank/lender we're going to work with and like a bank, we fund the mortgage.  We also process, underwrite and prepare loan documents at our location in South King County (this may be unlike a bank who'd processing center can be located in another State).

I've recently been provided a few examples of why it's advantageous to be a Correspondent Lender.   Ardell wrote a post at Rain City Guide about home buyers (or borrowers) being informed of when loan docs are "ordered", "sent" and "in".  A mortgage broker has to "order" loan documents from the wholesale lender/bank.   A form is submitted on paper or on-line requesting the loan documents be drafted.   The wholesale lender/bank where the loan is being brokered to will notify the mortgage broker once loan documents have been "sent" to the escrow company.  The escrow company will then send a confirmation to the mortgage broker that they have received loan documents–docs are "in". 

At our office, once conditions are met and we have final loan approval from our in-house underwriters, my processor prepares loan documents.  They are reviewed and then delivered electronically to the escrow company.  I receive notification from my processor that loan docs have been delivered to escrow and escrow confirms.  Our loan doc steps are "sent" and "in".

This creates a much smoother transaction since we remain in control of these vital steps.  Especially if there are any modifications or corrections that need to be made to the loan documents.  Instead of having to order a correction from the wholesale lender, our company is able to quickly react to any required changes.

The reason why I'm thanking my lucky stars I work for a correspondent lender and not a bank is because the bank is generally limited to their products and guidelines.   (A bank loan officer will tell you that they can broker or use outside lenders–just ask them how often they do–they're often compensated at a lower split if they send a mortgage outside of the bank).   Recently Wells Fargo decided they are going to start requiring appraisals on VA Streamline refinances.  (Hopefully other banks don't follow).  One of the benefits of a VA (or FHA) Streamline refinance is that an appraisal may not be required.   If I was a mortgage originator employed at this bank, then I would be stuck with their underwriting overlays (guidelines in addition to what VA is requiring); my clients who are Veterans would be required to prove their homes values and may not receive the benefit of reducing their mortgage rate.

As a correspondent lender (or mortgage broker), I know that odds are, if I have a VA Streamline refi (aka IRRL: Interest Rate Reduction Loan) I'm going to use another source for my client where an appraisal is not required.  

During these times, many banks/wholesale lenders have their own underwriting overlays in addition to what is being required by Fannie Mae, Freddie Mac, HUD or VA.  Correspondent lenders and mortgage brokers have the ability to review wholesale lending guidelines to help direct their clients to a product best suited for their needs.

It's nice to have options and control–it's nice to be a correspondent lender.

Filed Under: Escrow and closing, Mortgage, Underwriting and Qualifying, VA Mortgage Loans

New FHA Limits on Cash-Out Refi’s

March 17, 2009 by Leave a Comment

If you're considering refinancing and you're interested in taking cash-out to pay off debts, make home improvements or to eliminate a second mortgage that you did not obtain when you purchased your home; you have more reason than ever to start now.

Effective on FHA case numbers issued on or after April 1, 2009; FHA will only insure cash-out refinances when the loan to value is 85% or lower than the appraised value.  Your appraised value is not based on what you feel your home is worth — it's based on what your neighbor's have sold their homes for in the past few months.

If you have owned your home for less than 12 months, FHA is limiting cash out refinances to which ever is lower: 85% of the appraised value or 85% of the original sales price. 

According to HUD's Mortgagee Letter 2009-08, this is currently a temporary requirement:

"Given the continued deterioration in the housing market, and FHA's need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken."

Well, what are you waiting for?  You have two weeks as of today for FHA's expanded cash out guidelines of 95% loan-to-value with loan amounts up to $567,500 in King, Pierce and Snohomish counties.   If your home is located in the State of Washington, and you're interested in refinancing, you can apply on line (under Favorite Links).  By the way, I have been originating FHA mortgages for nine years and we have in-house FHA underwriters at Mortgage Master…as I mentioned, I can only help you if your home is in Washington.

Filed Under: Debt Restructuring, FHA, Refinance, Underwriting and Qualifying

Is My Preapproval Still Valid with all the Rate Changes?

October 29, 2008 by Leave a Comment

iStock-000018668640XSmallMy clients and readers ask such great questions…I just received this one from one of my clients that I’ve been working with since June of this year:

“…with all the rate changes how is our pre-approval looking? It the original amount still applicable?”

 

[Read more…]

Filed Under: Interest Rates, Residential Purchase, Underwriting and Qualifying Tagged With: , , ,

Form 4506: Not Just for Stated Income Loans Anymore

September 11, 2008 by 7 Comments

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