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Mortgage Guidelines for Debts and Liabilities

Liabilities in Mortgage Lending
In my previous post, How Mortgage Companies Document Employment and Income, we touched on the income used to qualify borrowers. Income is only half of the equation used to figure an applicant’s ratios. The other half is debts or liabilities.

Debts that are generally used for qualification purposes:

• Revolving debts (credit cards, some credit lines, etc.)
• Installment debts (auto loans, boat loans, etc.)
• Auto lease payments
• 1st and 2nd Mortgages, including Principal, Interest, Taxes, Insurance and Association Dues on any real estate owned and not rented.
• Alimony Payments
• Child Support Payments

The 10 Payments or Less Mortgage Rule
Payments on installment debts, child support and alimony are not usually counted if there are 10 payments or less (in some cases it’s 6 payments or less!) remaining on the loan. This does NOT apply to leases, as the mortgage company will assume that the borrower will be leasing again at the end of the term.

Debts that are generally not used for qualification purposes:

• Utilities (gas, electric, phone, cable, etc.)
• Insurance (other than homeowner’s)
• Mobile phones
• Taxes (other than property insurance)
• Groceries or personal expenditures
• Certain collateralized debts, such as stock margin accounts

Purchasing a Home, Without Selling the Current One
There has been a lot of interest from borrowers lately who are intending to purchase a new home without selling the old one. Under previous rules, as long as borrower’s had a valid lease agreement on their current home, they could use that money to offset their current mortgage payment. Those days are long gone. Now, applicants wishing to buy a new primary residence without selling the old one have to qualify with both mortgages (including taxes, insurance and association dues.) In order to use rental income to offset a mortgage payment, the rental income must be shown for 2 years on filed Federal Tax Returns.

Is it on your Credit Report?
Basically, if it appears on the borrower’s credit report, mortgage companies will count it as a liability (with the exceptions noted above.) In my next post, we will take a look at ratio calculation.
Questions? Please leave them in the comments!

How Mortgage Companies Document Employment and Income

Mortgage Company Income and Employment Verification
In a nutshell, mortgage companies need to verify a two-year history of employment to use the income on the mortgage application. Employment stability must be established for the two-year period, including verification of all jobs for applicants who have had more than one employer.

Employment Verification Methods
There are two acceptable methods for mortgage companies to verify employment and income.

1. Verification of Employment (VOE) Form. A VOE is sent by the mortgage company to the applicant’s current and previous employers. The employer fills in the blanks, noting employment term, income breakdown and any future projections of pay or employment change.
2. Alternative Documentation (Alt docs). The applicant is asked to provide written documentation regarding his/her employment and income. This generally includes paystubs covering the previous 30 days and W2′s from the prior 2 years. For borrowers who will be using commission, bonuses or self-employment income to qualify, complete personal Federal Income Tax Returns for the prior 2 years will also be necessary. Additionally, if an applicant owns 25% or more of a business, the previous 2 years business tax returns and a year-to-date Profit and Loss statement will be required.

Prior to closing, a verbal verification of the applicant’s employment will often be required.

Monthly Income Calculation
Once a two year employment history is established, mortgage companies need to figure the income as a monthly figure. Gross income (income before taxes) is generally used, except for self-employed borrowers. The income is figured as follows:

Type of Income	Monthly Income Calculation
Annual Salary	Annual Salary / 12
Hourly	Hourly Rate X Number of Hours Worked
Full Time	2080 X Hourly Rate / 12
Semi-Monthly	Semi-Monthly Rate X 2
Bi-Weekly	Bi-Weekly Rate X 26 / 12
Commissions, Bonuses, Overtime	2 Years / 24 (Many restrictions apply)
Social Security, Child Support (Non-Taxable)	Monthly amount + 15% to 25%, depending on type
Self-Employed	2 Years NET Income / 24 (Many restrictions apply)

Analyzing Employment Stability
Mortgage companies use employment stability to help determine an applicant’s ability to repay the loan. Employment stability does not mean that the borrower has to have been at the same employer for the last two years. Here is a little of what mortgage companies are looking for:

• Demonstrated ability to maintain full employment over time.
• Applicant’s employment in a field with continued demand and advancement opportunities.
• Education or training that can lead to higher incomes and career advancement.
• Frequent job changes to maintain or increase income.
• Consistent earnings for seasonal workers.

What mortgage companies look out for:

• Employment gaps.
• Declining earnings.
• Unrelated types of employment.

There are many more income types that go beyond the scope of this article, including part-time employment, unemployment earnings (yes, it can be used in some cases!) and income property rentals.  Mortgage companies know that every borrower’s situation is different.

Always remember to make sure you’re dealing with a reputable loan officer!

Do you have any questions about income or employment? Please leave them in the comments!

3 Ways to Refinance your Home when you’re Underwater

Lowest Rates in 60+ Years

Interest rates are low. The lowest I’ve seen in my 16 years in business, by far. In fact, interest rates are lower now than any time back through at least the early 1950’s.  In short, if you haven’t refinanced yet, you should now!

But what if your home is underwater? Here in Southeastern Michigan, our home values have been hit especially hard, and many homeowners owe more on their mortgages than the house is worth. I talk to people every day who just want to know what they can do. Thankfully, there are a few programs that can help.

FHA Streamline Refinance

The FHA Streamline Refinance program is still alive and kickin’! It has been modified a good deal from it’s original state a couple of years ago, but it’s still a powerful program. Essentially, it allows homeowners to refinance their FHA mortgages with no appraisal, at all. Notable Restrictions: Minimum 640 FICO score, maximum Debt Ratio: 45%, Borrower must be refinancing a current FHA mortgage, Borrower must be saving at least 5% on monthly payments as a result of the refinance. No cash-out allowed.

FNMA DU Refi Plus

The Fannie Mae Refi Plus program enables underwater homeowners to refinance their mortgages. This program allows homeowners to refinance their loans up to 125% of the value of the house. Notable Restrictions: Minimum 640 FICO score, Borrower must be refinancing a current Fannie Mae backed mortgage, No cash-out allowed. Find out if FNMA owns your mortgage here.

FHLMC Open Access

The Freddie Mac Open Access program, like it’s FNMA cousin, allows underwater homeowners to refinance their mortgages. In most cases, the mortgage can be no more than 105% of the value of the house. However, special provisions do allow for up to 125%, although interest rates are not very attractive. Notable Restrictions: Minimum 640 FICO score, Borrower must be refinancing a current Freddie Mac backed mortgage, No cash-out allowed. Find out if FHLMC owns your mortgage here.

Questions or comments? Please leave them in the comments section!

Income Tax Credit Extended until April, 2010

cc licensed flickr photo shared by woodleywonderworks

Time to Buy a Home?
The $8,000 income tax credit for first time homebuyers has been extended until April 30, 2010. The previous expiration date for the credit was November 30, 2009. Additionally, the qualifying criteria has been modified to include more homebuyers.

Here are some of the specifics:

• $8,000 (or 10% of the purchase price, whichever is less) income tax credit is available for first time homebuyers who have not owned a primary residence in the past 3 years.
• Up to $6,500 income tax credit available for buyers who have lived in their primary residence for the last 5 years, and want to purchase a new primary residence.
• Maximum purchase price to qualify for credit is $800,000.
• Purchase agreement must be signed by April 30, 2010. Closing must occur by June 30, 2010.
• Individuals earning up to $125,000 per year, and couples earning up to $225,000 per year qualify.

Let’s get this housing market booming again!

How Long Do You Have to Wait to Get a Mortgage After a Short Sale or Foreclosure?

cc licensed flickr photo shared by respres

 

Times Have Changed
For 15 years, I have originated mortgages for people. For the first thirteen of those years, nobody ever asked me what happens if they stop making their mortgage payments. The issue of foreclosure was so taboo, that it wasn’t even brought up in a joking manner. The idea that someone wouldn’t couldn’t meet their obligations was scorned by everyone. Then, about 2 years ago, all that changed.

Now I have past clients, friends, and acquaintances asking me what happens if their mortgage goes into default. There is no “beating around the bush.” Everyone gets straight to the point. There is no taboo.

Investors Make the Rules, Not HUD
It is difficult to find information about the future mortgage impacts of the decisions you make today. This is due, in no small part, to HUD’s (US Department of Housing and Urban Development) lack of documentation on the subject. Many of the rules fall to the individual investors to interpret, and they certainly don’t publish their guidelines for public consumption.

If you, or someone you know find yourself in a situation where you might lose your home – do not despair! Time heals all credit wounds. Just remember, keep your credit clean after any of these events. Everything in the mortgage world is credit score driven, and the minimum score for FHA currently is 620.  

Here is a basic list of FHA investor guidelines from most of the banks we deal with. This list assumes good credit history after the event, and otherwise standard qualification.

How Long Until You Can Get a Mortgage? 

What Happened?	*How Long Until you can Get a Mortgage?
Foreclosure	3 Years
Deed-In-Lieu of Foreclosure	3 Years
Short Sale with Good Payment History	2 Years
Short Sale with Late Payments	3 Years
Bankruptcy	2 Years from Discharge

*FHA only. FNMA/FHLMC guidelines much more strict. Generally 5 years minimum time.

What Would You Like to Know?
Accurate mortgage information is often hard to find. What would you like to know? Please leave your questions in the comment section!

FHA Streamline Credit Score Requirements Continue to Rise

In early May, 2009, we got word that Chase Correspondent Lending (Chase Bank) is raising their minimum credit score requirements for FHA Streamline Refinances. While this is only one of many banks lending on this program, there tends to be a trickle-down effect. Chase is one of the largest-volume FHA Lenders in the nation. Most of the time, we see other banks tweak their guidelines to fall in line with the perceived leaders. In a nutshell, we can likely expect other banks to fall in line rapidly.

Essentially, Chase’s new guidelines for FHA Streamline Refinances will require full credit qualification for borrowers with credit scores under 660. The minimum credit score with Chase remains at 620. Borrowers with credit scores between 620 and 659 will be required to provide full income, asset and credit documentation. There will still be no appraisal requirement (provided the new mortgage amount does not exceed the original loan amount.) Borrower’s with credit scores above 660 will not be required to provide income, asset or credit documentation on an FHA streamline refinance.

As of now, Chase is the only lender to have adopted these new guidelines. I have access to many different banks and mortgage programs, so the impact of these changes has not been felt yet. I will keep this blog updated to reflect changes as they happen.

Streamline Refinances for Conventional Mortgages

The US Government has stepped up to the plate, bringing help to homeowners who have seen their property values fall.

For homeowners who are having trouble refinancing due to plummeting property values, a new limited-time government program has become available to Mortgage Now, that promises to remove many of the barriers to mortgage refinancing.

Fannie Mae(FNMA) and Freddie Mac(FHLMC) Refinance mortgage programs have been expanded to allow for borrowers to refinance their existing loans, up to 105% of the value of their home, with no mortgage insurance (PMI.) These programs just became available at the end of April, 2009, and are only around for a limited time, and very few lenders have them.

While there are a lot of guidelines, the basics of the program include:

• The investor on the borrower’s current mortgage must be FNMA or FHLMC. Note that the loan will be serviced by a lender, such as Chase, Wells Fargo, etc.
• The borrower can not have PMI currently, and it will not be imposed on the new mortgage, up to 105% of the value of the property.
• Second mortgages can be subordinated, to an unlimited LTV. Approval will require the second mortgage lien holder to re-subordinate the loan.
• The borrower’s payment must be going down, or the borrower must be changing to a more stable product (ARM or Balloon to a Fixed Rate)
• While no minimum credit score is required, 620 will likely be the lowest approvable.
• Fixed and Adjustable Rate mortgages available.
• Rate and Term Refinances only – No Cash Out.
• Primary residences, Second homes and Investment properties are all available.
• In some cases, no income or asset documentation is necessary.
• Homeowners must be current on their existing mortgage.
• Closing costs can be rolled in – with some restrictions.

There are a lot of restrictions and fine points of detail on these programs. Not everyone will qualify. Please contact me with your specific mortgage details, and we can find out if there is a benefit to you.

FHA Cash-Out Guidelines Change – 85% LTV Effective 4/1/09

A letter went out to lenders this week from the Federal Housing Administration (FHA), which plans to make it tougher for borrowers to secure a cash-out refinance mortgage.

Until now, the FHA has approved cash-out refinances for homeowners who have at least 5% equity in their properties and a record of on-time payments for at least one year.

However, beginning April 1, this type of refinancing will be restricted to borrowers with at least 15% equity in their homes.

This is a "temporary change" said current FHA Commissioner Brian D. Montgomery, while the FHA determines whether "permanent measures" should be taken.

In other words, call your lender today if you are contemplating a cash-out mortgage in the near future. Mortgage companies only have until the end of the month to make an application before the new rules are implemented.

Still Doing FHA Streamline Refinances with No Minimum FICO

Edit 4/30/09: FHA Streamline Refinances with credit scores below 620 are no longer available.

Over the last couple of weeks, some of our investors have begun requiring a minimum FICO score on FHA Streamline Refinances. FHA has allowed streamlined refinances without using credit since the early 1980’s. Just so we’re clear, the new changes do not seem to be mandated by FHA. Rather, it seems that the investors have taken it upon themselves to impose new minimum credit scores.

Many Brokers Have Lost the Ability to Do Streamline FHA Refinances
Some of the biggest investors in the nation have stopped underwriting FHA streamline refinances for borrowers with credit scores below 620. Some banks and mortgage brokers with limited access to various investors have found themselves unable to close borrowers on this program.

Say “NO” to Higher Fees
As of this writing, I have access to numerous banks that still allow credit-score-free refinancing on the streamline program. If your lender has told you they can’t complete the program because of your FICO scores, or they want to charge you higher fees, give me a call today. My rates on FHA Streamline Refinances are the same whether your credit score is 780 or 480.

Why FHA Streamline Refinance Mortgages are Popular Now

Edit 4/30/09: FHA Streamline Refinance loans with a credit score below 620 are not currently available.

The FHA streamline refinance program is good news for homeowners who currently have an FHA insured mortgage. This program is the closest thing mortgage lenders have to a “no-doc” loan with decent interest rates. The basic premise of the program is simple; if borrowers are lowering their monthly payments, it must be good for them. FHA streamline refinances are a popular choice for a number of reasons.

Here are some of the features of the program:

1. For borrowers with FHA mortgages with a good payment history
   To be eligible for the FHA streamline refinance program, borrowers must currently have a mortgage insured by the Federal Housing Administration (An FHA loan). They must have a good payment history in the last 12 months. (Good generally means not late 30 days more than once in the last 12 months. Additionally, the current FHA mortgage must not be behind at the time of application.
2. FHA Streamline Refinance does Not use a Credit Score
   While the lender will run your credit report to check the mortgage history, the report is not used to determine eligibility for the FHA streamline refinance program. In other words, a borrower’s credit score isn’t used. Neither are late payments, collections or judgements on accounts other than the mortgage being refinanced.
3. No Income or Asset Verification
   Income and assets of the borrower are not verified for the FHA streamline refinance program. It is important to note that the customer must have a job and must have a bank account.
4. No New Appraisal
   A new appraised value is not used. Decreasing home values have been a barrier to refinancing for many borrowers in this environment. The FHA streamline refinance eliminates this barrier. Even if the customer’s home value is less than the amount of the mortgage, it’s still okay.
5. Secondary Financing Okay
   Second mortgages and home equity loans are fine in conjunction with the FHA streamline refinance program, even if they are above the value of the house. The second-mortgage lienholder (the bank that the customer makes payments to) must agree to subordinate the loan. That means that the second mortgage will take second lien position behind the new FHA mortgage.
6. 30 Year Fixed Interest Rates
   The FHA streamline refinance program is offered with 30 year fixed and 15 year fixed interest rates, which are very competitive. Often, the rates are as low as, if not lower than, conventional conforming interest rates.
7. Closing Costs can be Rolled into the Mortgage
   Borrowers can choose to roll their mortgage closing costs into their new FHA streamline refinance if they choose to. However, the new loan amount can not exceed the original FHA mortgage loan amount.
8. No Cost and Low Cost Mortgages Available
   FHA mortgage lenders have the ability to pay a portion or all of the closing costs incurred with the FHA streamline refinance program. Generally, borrowers pay a slightly higher interest rate than if they pay the closing costs directly, or roll them into the mortgage amount.
9. No Cash Out
   The FHA streamline refinance program does not allow for cash out.
10. Borrowers Must be Bettering their Situation
    The FHA streamline refinance must result in a lowering of the borrowers principal and interest payments.

For borrowers that have an FHA mortgage currently, the FHA streamline refinance program may be a good way to lower their mortgage payments.