Do you own your business and maximize your expenses to minimize your taxes?
Who wouldn’t employ this strategy!
Well, a break-even tax return would prevent you from getting a conventional mortgage. But if your business has been open for two years, and you can show reasonably consistent deposits each month – then you might qualify for a mortgage under a bank statement program.
You can be approved for a mortgage based solely on your bank statements – without the lender even needing to see your tax returns. There are programs that will accept as little as three consecutive months of bank statements. The more months you are willing to provide (i.e., 24 months provides the best interest rate), the more comfortable the lender can become with your operations.
The lender will tally your average business deposits, and apply an expense ratio – which could be from: (i) an internal or third-party industry standard, (ii) your external accountant, or (iii) your Profit & Loss Statement that matches your selected bank statement period.
Since your resulting net income figure is used to calculate the mortgage amount for which you could qualify, it is more advantageous to select the current bank statement period that maximizes your business deposits.
Some lenders will:
Here’s the Point: Don’t pass on obtaining a mortgage just because you think your tax return doesn’t
report enough business earnings.
Sellers know their bottom-line sales price. But sometimes it pays to incentivize a motivated Buyer – especially if the Buyer has limited liquidity to cover their down payment, closing costs and reserves.
If a Buyer makes an offer contingent on financing AND predicated on the Seller paying for all or a portion of closing costs (i.e., concessions), then the Seller may wait for a better offer. However, if the Buyer’s offer is silent on concessions, the contract may progress to a stage where the Buyer may consider sweetening the purchase price – in exchange for dollar-for-dollar concessions at closing.
A few issues to consider when Seller concessions are involved:
Lenders refer to Seller Concessions as Interested Party Contributions (IPC’s). IPC’s are generally the responsibility of the Buyer – but paid for by the Seller, and are either “Financing Concessions” (e.g., mortgage closing costs) or “Sales Concessions”. Financing Concessions are expressed as a percentage of the lesser of the appraised value or purchase price, and any costs covered by the Seller that exceed the Financing Concession limits (per the chart below) are deemed Sales Concessions.
Note that lenders deduct all Sales Concessions from the sales price when calculating LTV for underwriting purposes. Therefore, excessive IPC’s could limit the amount of Buyer loan proceeds.
Here’s the Point: Lenders impose limits on certain Seller Concessions (IPC’s), which, if exceeded, may provide pre-qualification challenges for Buyers.
Subsequent to the Housing Crisis, the 2010 Dodd-Frank Wall Street Reform Act imposed many new rules. This was a response, in part, to some unscrupulous mortgage lenders and brokers charging excessive fees to consumers.
Mortgage lenders and brokers cannot charge origination fees to borrowers that represent more than 3.0% of the loan amount (the “Points & Fees Cap”). As reasonable as this fee cap concept sounds, it is fraught with restrictions that are unfair to the people it was meant to protect.
Let’s take an example of a consumer wishing to borrow $120,000 to buy a home:
$2,700.00 - Mortgage Broker Fee (2.25%* of Loan Amount)
975.00 - Lender Administration (Standard Average Flat Fee)
$3,675.00 - Total Origination Fees
* Average Florida mortgage broker fees range between 2.0% to 2.75% (based on the interest rate selected, the borrower is eligible to receive a credit at closing to fully cover this fee for most conventional loans).
On the surface, the loan fails the 3.0% Cap (i.e., $3,675 of fees represents 3.1% of the loan). This renders the loan a “Non-Qualified Mortgage”, in which case Fannie Mae could elect not to purchase the loan from the mortgage lender. The lender might stamp “decline”, given their potential inability to monetize the loan.
And, if the lender imposes customary “risk adjustment fees” to compensate for a higher loan-to-value or lower credit score (or if the borrower pays a reasonable fee to “buy-down” the rate), these “Discount Points” must also be added into the calculation – making it impossible for the borrower to obtain a Qualified Mortgage. Fortunately, the regulators have acknowledged that some “bonafide” fees may be excluded from the cap calculation, allowing most mortgages to qualify after time-consuming compliance checks.
Here’s the Point: Regulators imposed a “Points & Fees Cap” to ensure that mortgage lender and broker fees are reasonable, but the resulting time-intensive compliance checks can delay closings.
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.
If you are financing the purchase of a condominium unit, you are going to need help from the homeowners’ association (HOA). A property management company is often hired to manage the affairs of the complex, but the HOA is ultimately responsible for many things – including:
Your lender will require a detailed project review whenever your down payment is less than 20%, or if your condo will be a rental property. This means the HOA will likely need to provide you with several documents (e.g., bylaws, financials, master insurance certificates) and complete a condo questionnaire to confirm that:
The questionnaire takes time to complete, and so the HOA may charge you a fee for doing so. But in the end, knowing everything about your purchase will protect you from unforeseen events – including special assessments for which you may be responsible right after your purchase.
In addition, the HOA’s insurance agent will need to provide you with written evidence that the condo master property and liability insurance also applies specifically to your unit being purchased.
Here’s the Point:
When you purchase or refinance a condo, there are several reasons why you will want the homeowners’ association on your side.
In 2015, the Consumer Finance Protection Bureau (CFPB) created “Know Before You Owe” mortgage disclosure rules. These were implemented to ensure that consumers would have easy-to-understand information before making what is usually their largest financial decision – namely, the purchase of their own primary residence.
There were a bunch of disclosures required by the CFPB – with changes introduced every year. The key disclosures are the Loan Estimate (which replaced the old Good Faith Estimate), and the Closing Disclosure (which replaced the old HUD-1 Settlement Statement). A lender or mortgage broker is required to issue you a Loan Estimate within three (3) business days to a prospective borrower who is “in application”.
Borrowers refinancing or purchasing a residential property are deemed to be “in application” when the following six items have been received:
This was a good rule, because consumers often never really knew what their loan costs and reserves would be until right before closing. Unscrupulous lenders and brokers had been “hooking” their borrowers – thereby making it difficult to change lenders right before funding.
Interestingly, these rules do not apply to commercial, reverse, mobile home or HELOC mortgages.
Here’s the Point:
Get a Loan Estimate as soon as possible when applying for a mortgage – so that you know what your costs are likely to be.
Most mortgage lenders specializing in residential mortgages will not extend financing unless you own the property in your personal name. This is usually a requirement of the investor who purchases the mortgage from the lender who closes on your loan. And this is the case whether the property is your primary residence, second or vacation home, or rental/investment property.
Why would you create an LLC or corporation to hold title to your real estate?
The main reason is usually to limit your personal liability – say, in case someone slips and falls while on your property. For example: If title is in your LLC, you are more likely able to shield your personal assets against a claim (however you should always consult with your attorney).
If you decide not to purchase a residential property in your personal name, however, the loan will be deemed a commercial loan – not a residential loan. While there are many community banks that will lend to an LLC or corporation, you would generally always need to personally guarantee the loan in any event. Also, commercial loan interest rates tend to be a little higher than a residential loan in your name.
Some people acquire their residential properties in their personal name, but then later transfer title via quit claim deed to an LLC. As a general rule, this is not permitted within the loan documentation – but residential lenders do not typically audit title (especially if you continue making your monthly mortgage payments on time).
Here’s the Point:
The interest rate will usually be more favorable when you purchase a residential property in your individual name.
First-time homebuyer programs (FTHP’s), when available, can make purchasing a home more affordable for low-to-moderate income individuals and families – but there is generally always a catch. For example, the Florida Housing Finance Corporation advertises that they offer fixed, low-interest rate FTHP loans. This is true, however the rate is actually higher than what is offered by the most active mortgage lenders in the industry.
Before you get excited about being approved under a government-sponsored first-time homebuyer program, you should know:
First-time homebuyer programs generally always require another separate government approval stamp. It is therefore not uncommon for loans to be declined at the last minute when it would appear the borrower could qualify for a regular conventional loan.
Sometimes all it takes is a little more preparation and guidance – and a first-time homebuyer can comfortably qualify for more cost-effective conventional financing.
Here’s the Point:
First-time homebuyer programs, if available, are not always the best or most cost-effective solution.