You went under contract to purchase a property, and then started accumulating the supporting documents to obtain your mortgage.Well, guess what? Your steps should have been reversed! Here are some common excuses for those who figured getting a mortgage would be easy, but then discovered there would be some difficulties:
Here’s the Point:Have your credit score pulled before you start making offers – and make sure it is a tri-merge report from all three credit bureaus.
Have the revenues from your business been solid over the past two years? Great! Well that’s not good enough to get a mortgage. Here are two main reasons:
The Federal National Mortgage Association (Fannie Mae) publishes self-employment income guidelines for lenders. To qualify for a mortgage, your self-employed net income should be stable, predictable and “likely to continue”. While having guaranteed, contractual income is not a requirement, lenders carefully analyze the financial strength of your business, your sources of income, and the economic outlook for your industry.
Some suggestions to maximize loan approval probability:
Here’s the Point: Make sure you produce a solid Letter of Explanation (LOE) to your lender that will support the continuity of earnings from your business.
“No, actually, I don’t know what you mean. Does their business generate a lot of cash earnings that they do not report to the IRS?”
“Well, I didn’t say that – but okay”.
“Sorry, I can’t help you – I don’t risk my reputation by recommending that my capital sources conduct business with someone who illegally evades taxes. Moreover, I think it’s offensive to imply that immigrants typically operate cash businesses to evade taxes”.
“Well then what exactly do mortgage brokers do?”
Before quickly ending my conversation with the banker (for obvious reasons), I indicated that I would be happy to work with self-employed people who legally minimize their taxes with legitimate expense deductions. Also, I would be happy to source mortgages for those who have not yet become U.S. citizens, do not have U.S. permanent residency, or even have not yet qualified for a social security number.
As long as a “foreign national” or non-U.S. citizen can evidence an adequate two-year foreign or domestic credit history, there are capital sources who will gladly underwrite their mortgage. In fact, it is a preferred business platform because statistics prove that these borrowers work hard to repay their debts – and tend to have solid liquidity and reserves. One key issue is that all required documents written in a foreign language need professional translation.
Do you really want to build your own house? The planning, budgeting, change orders, cost overruns, time commitment and anxiety… but, admittedly, it still may be the most economical way to own a home.
Then there are ramifications behind financing either the construction of a to-be-built home, or the acquisition of a home nearing completion. If you own the land, then you would need a construction loan – and your land investment would likely act as the equity or down payment for your lender. Construction loan draws would reimburse the builder as the home reaches certain levels of completion. Once completed, the construction loan would convert to a standard mortgage.If you are buying a speculative or partially completed home, then standard purchase mortgage guidelines should apply after you sign the builder’s purchase contract. Once the builder completes your home, your mortgage lender provides you acquisition financing (loan closing would coincide with receipt of the certificate of occupancy).
In either case, builders also hope to profit from your loan. They do this by offering attractive financing incentives, such as covering a portion of your loan closing costs if you use one of their affiliate or approved lenders. But be careful, because when they say: “We will cover closing costs if you use one of our approved lenders”. Not only will your interest rate likely be higher, this really means: “We will not provide any closing cost credits unless you use our affiliate lender” (thereby essentially “tying” you to their loan source).
You may have been conscientiously deliberating which candidate to vote for over the past several months. Your selection might become clearer if you contemplate this title question – as if you were a lender deciding whether to extend them a loan! Not voting is always an option, but not likely a decision that would sit well with you (even though reports suggest this option is seriously being considered by many voters).
When a client applies for a mortgage, the assignment is either accepted or declined – with concrete rationale behind either decision. But a lender electing to entirely avoid making the decision to either lend or not – may be compared to not voting. Imagine a lender choosing never to return your phone call to give you their credit decision. In this analogy, not voting (or not providing a credit decision) doesn’t help either candidate (or borrower) – nor would it likely help yourself.
There is no excuse for lender/voter unresponsiveness. Borrowers/candidates deserve prompt, reliable feedback which, from a lender’s perspective, is generally based on the following 5 “C’s” of credit:
The first one above was formerly entitled “Character” – which arguably is still the most important factor. But by telling a client their loan was declined because of “Character” (or lack thereof), the decision could be judged as discriminatory.
The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are not making their monthly loan payments. This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship. It’s no wonder lenders have tightened their related underwriting requirements!
Some say the consequences of simply assessing a higher default rate of interest is not harsh enough. Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.
A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default. But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.
When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date. Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%. Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.
Free? I think not! But there are definitely “lender credits” available to you, depending on the interest rate you select. The technical term for this credit is “yield spread premium”. But is the lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan? This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.
The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs. In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio. The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.
Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score. After following a program of credit card debt reduction, his FICO score increased from 599 to 642. This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.
Imagine some guy by the name of “Greg” using your name and social security number to borrow three private loans totaling $10,000. Wouldn’t you feel violated? You would also be furious if this showed up on your credit report only 5 days before your new mortgage is scheduled to close!
The fraudster is not about to make principal and interest payments on the scam loans. So your credit score will immediately deteriorate because of late payments, which you likely won’t even know about – unless you frequently check your credit scores.
This happened to a client of mine last week. His attorney recommended that he: (i) request a fraud alert be placed on his credit report, and (ii) commence making the required monthly payments on the fraudulent loans…
Imagine making payments on a fraudulent loan – and then trying to prove later that your payments should be recouped? I don’t actually blame the lawyer – because he was simply trying to stop the fraudster, and help the borrower get a mortgage by maintaining a decent credit score. What was missing, however, was that a new conventional or FHA mortgage lender will require evidence that an act of fraud had been committed – which will include the filing of a police report. The omission of or delay in filing this report gives the appearance of “hiding” the identity theft. It is very important to demonstrate to the lender that all the right steps have been taken to address the problem as quickly as possible.
My client made the right decision last week. He decided not to refinance his mortgage – even though:
(i) he qualified for a better interest rate (because his credit score had improved),
(ii) the value of his primary residence was way up, and
(iii) he could have used some of the equity in his home to consolidate debt.
His credit score was 650 – lower than what he had hoped for, mainly because of some unavoidable late payments a while back. Keeping his loan-to-value ratio at 80% (to avoid mortgage insurance premiums), he was surprised to discover that, with his credit score, he would still be assessed 3.0% of the loan amount at closing. In addition, because he was looking to pull out some equity (i.e., obtain a new loan greater than his existing loan amount), the “cash-out refinance adjustment” would have been another 2.625%. Along with a couple of other incidental adjustments for loan size and overall risk profile, the cumulative risk adjustments would have been 5.85% of his requested loan amount – or $5,850 on a $100,000 loan.
Sure – I found a lender who would offset all of these costs. The problem was his interest rate would be no different than the rate he already had on his existing loan. Also, his principal amortization schedule would reset upon the commencement of his new 30-year mortgage. Therefore, the portion of his new monthly mortgage payment attributed to principal reduction would be less than what his principal payment was under his existing loan.
My lender declined my client’s mortgage today, four days before Christmas. His existing loan expires on December 31, and this was his last chance to refinance before the lender could commence foreclosure proceedings.
This 70-year old gentleman has no late payments on his credit report. However, a credit card company entered a judgment against him six years ago, and conventional lenders require this to be removed before extending new credit. Unfortunately, he lacks the liquidity to eliminate the judgment, and his age has been an obstacle to finding a job to augment his social security income. Although the private lender liked his story, they would not accept a Debt-To-Income (DTI) ratio over 50%.
Many people rent the other side of their duplex – but the key issue is whether the lender will classify the rent as “boarder” income (100% of which may be used for qualification purposes) or “investment” income (only 75% of which is allowable – to factor in the potential loss of the tenant). The boarder income argument was valid because the building has only one tax parcel number and is still technically his primary residence. But the Underwriter disagreed, and the resulting lower income caused his DTI ratio to exceed the maximum threshold.
In the end, the proposed structure was declined at a lousy time of year. Fortunately, the lender agreed to approve a lower loan amount – and at a better interest rate. My client also has the ability to raise rent, which the tenant knows is below market.