Approval/Qualification Process category archives

Government loans, such as those backed by Fannie Mae, Freddie Mac, and the FHA, are slated to get more expensive and harder to qualify for, assuming changes recommended by the Treasury are implemented.

The agency released their recommendations for a complete overhaul of the mortgage market today, essentially calling for less attractive government-backed mortgages to restore the largely absent private market.

Among the changes they’d like to see are higher down payment requirements for Fannie and Freddie backed loans (10% down) and costlier annual mortgage insurance premiums on FHA loans (up .25%).

That, along with higher guarantee fees on loans securitized by Fannie and Freddie, should get the private market for mortgages up and running again.

Additionally, Treasury has recommended that the conforming loan limit fall to $625,500 from the current elevated level of $729,750 in the most expensive regions of the country on October 1, 2011.

All of these measures are aimed at reducing the government’s share of the mortgage market, which could prove a burden to taxpayers if not dealt with.

But the move could push mortgage rates higher, which are already at 10-month highs, according to the latest release from Freddie Mac.

And the fear is that such changes could throw a wrench in a possible housing recovery later this year.

The report noted that more than nine out of every ten new mortgage are guaranteed or insured by the government.

(photo: thetruthabout)

The top mortgage lender in the country has called for borrowers to come up with 30% down if they want to avoid higher mortgage rates and more restrictive lending tied to the “risk retention” requirements related to the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.

Essentially, the government wants to ensure that banks and lenders who write higher-risk mortgages actually retain some of that risk (5% to be exact), instead of selling it off to investors and wiping their hands clean of it.

After all, this originate-to-distribute model was arguably how we got into this mortgage crisis to begin with.

However, since the legislation was introduced, banks and industry players have come up with a number of ways to be exempt from this new rule, including:

“requiring documentation of income and assets, setting debt-to-income ratio standards, and restricting things like prepayment penalties, balloon payments, and negative amortization.

But Wells wants to take it one step further and ask that both those purchasing and those refinancing have 30 percent down payment/home equity.

Critics (including most other banks and lenders) believe this will lead to a large pool of loans subject to the five percent risk retention rule, greatly increasing mortgage rates.

In fact, the MBA believes rates could be as much as three percentage points higher on loans subject to the rule.

FHA loan lending would also increase because it’s not subject to the risk retention rule, putting more strain on taxpayers.”

Wells Fargo argued that half of mortgages already carry a 30% down payment, but critics believe the move could shut out smaller lenders and increase market share for the top banks, who already have plenty.

If down payment requirements/mortgage rates do rise, it could throw a wrench in the housing recovery everyone’s hoping will get underway this year and next.

(photo: thetruthabout)

The appraisal process can prove frustrating and time consuming for scores of prospective home buyers.

In turn, many appraisers have gotten a bad rap in recent months.  To help consumers better understand the process and the role of appraisers, the Appraisal Institute recently published a list of tips. Based in Chicago, the Appraisal Institute is an association of more than 24,000 professional real estate appraisers.

The tip sheet comes at a time when some appraisers are taking heat,  blamed at times for potentially costly delays and even for prolonging a decline in real estate values.

“Appraisers today are doing the same thorough, fact-based research and analysis they have always done,” Institute president Joseph C. Magdziarz said in a news release. “Appraisals are especially important because they are an objective and unbiased source of information. Unlike others involved in real estate transactions, the appraiser is an independent professional who performs a service for a fee rather than for a commission.”

The institute points to standard market declines and subsequent lender caution as the driving force behind some mortgage processing delays.

Here’s a look at some of the Appraisal Institute’s tips for consumers:

To learn more, consumers can download the Appraisal Institute’s checklist (note: this is a PDF file) via its website.

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Since FHA decreased the UFMIP (up front mortgage insurance) premium and increased the Monthly MI (mortgage insurance) premium, I have seen an uptick in the number of Homepath renovation loans I am originating and I thought I would share why.

Whenever you make a comparison between loan programs you have to start with some Assumptions or a scenario:

Purchase Price:                    $200,000

Cost of Renovation:            $30,000 (if the cost of Renovation exceeds $30,000 no need to compare Homepath is not an Option)

Fico Score:                              660 (if your Fico score is less than 660 no need to compare Homepath is not an Option)

Property Type:                     Single Family or Condo (If the condo is non-warrant-able and cannot be FHA Approved no need to Compare FHA is not an Option)

Max Financing:                     FHA 96.5% LTV and Homepath 97%

What is the Difference in the rates? 

Homepath:With the above scenario I would have to charge 5.25% with 2.125% in points.  The homepath program has a number of loan level price adjustments that total 5.375% in points which include: 1.25% for loan to value and FICO score, 3.625% for No MI, .50% for 97% Loan to Value.  Those adjustments can be paid in cash as additional closing costs or paid by the lender by charging a higher rate.  The highest rate on my rate sheet today is 5.25% and that will allow me to pay 3.25% of the 5.375% in LLPAs leaving 2.125% that will need to be charged as points.

FHA 203(K) Streamline: With the above scenario I would be charging a rate of 4.75% with 0 points.  FHA does require UFMIP of 1% that is typically added to your loan amount in addition to requiring an additional .5% down payment. 

So…The real difference is about .50% in a rate and .625% in  points!  the monthly payment is about $100 less per month with the Homepath loan than the 203K streamline.  Closing costs and paperwork between the two programs are pretty similar.

Take a look at this Total Cost Analysis that I prepared comparing the two programs.

In the mortgage industry as in many industry there are words tossed around like school house chatter which have a clarity of meaning to insiders yet are somewhat foreign to the clients being served. Most home buyers and owners who are refinancing assume if they are getting a loan from LMNOP Mortgage that is their mortgage company for the entire time they have that loan.

Not so fast.

During the application period you will be asked to sign the “Servicing Disclosure Statement” which in essence is telling you whether or not your loan will be serviced by the lender or broker originating your loan. (Image)

What is “servicing”?

The lender who originates your loan may or may not accept and manage your payments.  Smaller lenders may not have the staffing power to do so and larger lenders may like the reduced risk of having a third party company handle mortgage payments, collections and even foreclosure proceedings as required.

The servicer and the lender will enter an agreement about the payments. Generally the servicer will pay your mortgage payment on the 1st of the month to the lender. They actually will pay multiple mortgage payments at once using electronic transfer of funds.  The servicer makes a small gamble that you will either pay early or pay late enough that the servicer’s late fee comes into play. The servicer will pay the lender a reduced cost for the mortgage payment and keep all of the late fee.

When the mortgage and real estate industry began to collapse the servicers were not ready to handle the huge volume of foreclosures, short sales and inexperienced negotiators which cause a huge backlog and resulted in several short sale opportunities being lost, homes being foreclosed on much later than they normally would have and loan modifications being delayed by weeks or months.

The originating lender is not required to tell you to whom they will be selling/transferring the servicing of your loan. They are required only to indicate the likelihood of your loan and/or servicing being transferred or retained.

A “one touch” file is a loan package submitted to the underwriter that includes every piece of documentation required for them to stamp the folder with three words every loan officer wants to hear – Clear To Close. – Baseball has home runs, football has touchdowns. Loan officers have one touch files. This is the goal top originators strive for when submitting a file for underwriting approval. Let’s take a quick look at how a loan package flows from start to finish.

Loans start by completing all the fields in the 1003 (the loan application). Experienced loan officers realize there will be need for further investigation. Additional questions allow originators to better assess a client’s situation and go a long way toward preventing issues with the loan later in the process. Let’s look at a few examples. Payroll deductions such as 401K loans, child support or even tax liens not disclosed at loan application can increase debt ratio and kill a loan. Consumers do not always disclose these deductions, however, they always get discovered. Whether or not someone else will be on the title is often something that doesn’t get asked. Do you own other properties? Do you owe the IRS any money? Do you pay alimony or child support? Are you obligated to any other debts not disclosed in your credit report? Have you filed a bankruptcy? These are questions required for a complete loan application but often overlooked.

The next step in the loan process is to gather documentation. Most often this is done by the loan originator. Sometimes this task is is done by a loan assistant or processor. The documentation process is critical in determining how smoothly the loan will flow to closing. One important thing to remember when it comes to underwriting and exceptions in the mortgage world of 2010. There are no exceptions. Complete loan files contain the same documentation all the time even if underwriting findings don’t ask for it. Pay stubs covering the most recent 30 days. W 2′s for the most recent two years. Tax returns for all self employed (business returns to be included). Most recent statements covering three months of all assets you declared on the loan application, 401K, savings, stocks etc. Documentation of any loans against a 401K to include monthly payment and balance owed. Child support agreement. Divorce or separation papers. The loan originator should attempt to probe with questions to be certain the need for additional documentation is met. Seasoned loan originators understand the importance of additional documentation. Establishing value via com parables and appraisals are critical. In the case of refinancing, home valuation can be a quick deal killer. It is also important to make sure credit bureau reports are up-to-date. Payoffs for all liens must be ordered as well as any subordination agreements.

Now the loan is ready to be prepared for submittal to underwriting. It really is a team effort at this point. If a processor has to stop to gather additional loan documents the loan originator failed to obtain, the loans waiting in line to be processed come to a screeching halt. Inefficiency extends the time it takes to close a loan.

Underwriting guidelines are pretty much cut and dried these days. If there is a guideline for it, documentation must be there to back it up. Most lenders order a 4506T from the IRS. This is a copy of tax transcripts and the document that shows any additional loss or income other than shown on the loan application. In other words, if you did not disclose any business income or loss it will be discovered at this point and your loan file will be subject to re underwriting once new income figures are adjusted. Not only that. it sends red flag signals to the underwriter reviewing the loan. The way in which vesting is on the title is now required to precisely match the mortgage clause on the insurance binder. The underwriter checks for this as well.

The one touch file becomes reality when conditions come back from the underwriter stamped “clear to close“. Often the most completely assembled files come back with conditions (stips) that may not have been flagged during application or processing.

If you find that your loan officer and/or processor submitted and received a one touch file on your deal, give them a thumbs up as they have achieved the ultimate mark of efficiency in the loan process.

For many, this is an irrelevant question. Most clients I meet with are able to qualify for much more than they want to afford, and they are placing budget limits on themselves rather than having the lender hold the limit over their head.

Yet, some are in a situation where the amount of home they can qualify to purchase just doesn’t meet enough of the items on the wish list, or even the must-have list for that matter. For them, patience is required, and maybe some good advice as well.

There are a few variables we’ve discussed in the last few posts that I can exploit to help folks in this situation increase their home-price approval amount.

First, it almost always works to pay off debt. If you have a car loan of $12,000 and your payment is $325 per month, work extra hard to pay off the loan early and then start putting that money aside for your next car purchase. If your qualification maxed out at a $150,000 home with the car loan, then you would be qualified to purchase a $200,000 home if you had no car payment. The same goes for credit cards, student loans, and any other kind of debt you have. Eliminating it before buying a home is not only fiscally responsible, but it will also give you more buying options.

The second idea is to save more money. The larger your down payment, the lower your monthly payment. For every $1000 you put down, your monthly payment goes down by around $6 per month. That doesn’t seem like a lot, but it adds up. There is also the benefit of being able to avoid paying mortgage insurance. If you can save an extra 5 or 10%, you may be able to not only save the $40 to $70 per month in the payment, but avoid a $100 PMI payment as well. This in turn can raise the amount of home you qualify for.

Look for a home that needs repairs or one offered at a deep discount. More home does not need to mean a more expensive home. Many homes in all kinds of neighborhoods need some work, but have a lot of square footage. Buying a home that is in short sale or that is owned by a bank can be very frustrating because of the waiting game required. But the payoff in the end can be huge.

I am assisting a client right now that I met last October when he made an offer on a home that was in short sale. He was strung along until May just to find out that the home was finally being foreclosed upon and that the bank would have to fully take it over before it could be sold. He waited another month and when it came on the market he made another offer. His offer was not taken, but another was. He still waited, though, because the accepted offer still needed to be approved. This offer was finally declined, and the house went back on the market again. Another offer made and this time it’s looking more promising. Meanwhile he paid off some debt and saved a little more money.

He’s glad he waited. Patience in this case will win this buyer a very nice home that was sold in 2006 for over $600,000. He will get it for around $250,000.

Patience is the key here. Pay off debt. Work to understand the market and find a good deal. Save more money. All of these things require patience, potentially the one key ingredient missing in the past few years.

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Verification and Validation – how it can affect your loan. -

Today’s economic crisis has taught mortgage lenders one huge lesson they are all living by  - verify and validate every loan file. Documentation – sounds like an easy task, but simply turn the clock back just a few years to the days of stated income loans, no income loans and even no income, no assets, no doc loans (just give me a high credit score) and you have the reason we now live in a Full Documentationworld. Did these loans make sense? Opinions vary, but eliminating as product that was intended for self employed borrowers has restricted business owners from tapping needed equity to stay operational. Ask any business owner you know what they think the chances are of qualifying for a loan would be today.

Below are 7 items that must be verified and validated these days when applying for mortgage financing:

Employment – Even after a loan has been cleared to close, telephone confirmation of employment is now routine just before a loan is scheduled to fund. In other words, don’t quit your job!

Income – 30 days worth of pay stubs. Previous two years W 2′s. If you show any kind of business income or loss, last two years tax returns (business and personal). Signed 4506-T forms at loan application allow lenders to order tax transcripts from the IRS to match up to your income… And they all order them. If you show a loss on your tax returns tell your loan officer upfront and save yourself frustration. This is not always a deal killer but will affect your debt ratio.

Assets – When a loan is run through automated underwriting it takes into account the assets that are stated. If you show money in checking, savings, 401k or any other investment, you will want to validate it by providing statements. Many times the final page or pages of the statements are blank. Include ALL pages of your statements regardless if they are blank. Note – if you are printing these documents from the internet, as a security measure, institutions do not include name or account number. This would not be acceptable documentation.

Deductions –  Provide supporting documentation for payroll deductions such as child support, alimony, garnishments, 401k loans. Anything that affects your debt ratio must be documented which would include providing divorce and separation agreements and terms of of 401k loans.

Appraisals – This verification is done behind the scenes, but rest assured, even with all the new HVCC appraisal regulations, lenders validate appraisal figures through automated valuation models (AVM’s). The days of stretching home values in order to close a deal are long gone.

Gift Funds – Lenders want to see gift money comes from an acceptable gift source. And they way to show this is a paper trail… A bank statement from the gift source showing funds were available and a copy of the transaction transferring monies from the gift account to the borrower if deposited into borrowers account.

Earnest Money Deposit – Also referred to as the EMD. Many times this single item goes undocumented and causes a delay in clearing a loan to close. Sure we need a copy of the front of the check, but lenders want to see that the money was deposited before crediting it to the transaction.

These are just a few examples of documentation to gather when applying for a mortgage. This is just a guideline to use and lender requirements can and will vary, but providing the above documentation to your loan officer, you will greatly reduce the chances of frustration and delays in your loan closing. The mortgage process can be stressful enough these days. Supplying the required documentation the first time a loan is submitted to underwriting will increase the chances of a stress free closing.

If you have ever used Excel spreadsheet, which I do daily in calculating mortgage and investment solutions, the answer to the question in the title of this post requires a circular calculation.

Here’s what I mean. As you are solving for the amount of home that translates into the amount of payment you want to have, changes in one box, necessitates changes in another, which in turn changes the payment which requires a change in one or more of the inputs.

Excel does this for you, but you can do it too.

You take a simple mortgage calculator and plug in a few variables. Let’s say rates are 5%, you are choosing a 30-year fixed mortgage—so 30 years or 360 payments—then you put in an amount of the loan you will be borrowing, and you solve for the principle and interest payment.

Add a monthly amount for property taxes – Summer and winter amounts added together and divided by 12.

Add an amount for home insurance. For an estimate, take the sale price and multiply it by 0.0035 (or .35%). Divide that by 12. Then, if you have mortgage insurance (which you would for an FHA loan or a conventional loan with less than 20% down), you need to calculate and add that in. For most deals, you’ll get close enough (a little to the high side) if you use an amount that is 0.0075 (or .75%) time the loan amount. Divide that by twelve and add it in as well.

Once this is all added together, you can see where you’re at and start to move upward or downward in the price of the home (moving taxes, insurance, and mortgage insurance up or down as well).

Let’s say you are after a $1500 payment, and you want to put 10% down on a conventional loan. Without checking first, we start with a particular home that has a sale price of $200,000. You have $20,000 to put down, that’s 10%. The seller is going to pay all of your closing costs.

Your loan amount is $180,000. At 5%, 30-year fixed, the principle and interest payment is $966.28. Tuck that away.

The taxes on this particular home are listed to be $4260 per year. That makes $355 per month.

A good estimate for home insurance is 0.0035 times the sale price. $700, more or less – round up to $720 and you have $60 per month for this.

Mortgage insurance is next. Take the $180,000 loan amount and multiply by 0.0075. That comes to $1350. Divide that by 12 and you have $112.50

Your payment for this particular home would be $1493.78 per month, all included.

(If you are buying a condo, you can usually eliminate the home insurance and add in the association dues. The rest would be about the same.)

Not bad for your first try!

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The answer to this question defines the “simple but not easy” category of mortgage education if ever there was such a category.

Simply put – you take your gross monthly income, multiply by around 40% (0.40), subtract from that number the amount of the minimum payments on all of your other debts, and the resulting number is the amount of your maximum house payment. Lastly, the house payment must include the principle and interest amount, property taxes, home owners insurance, and association dues if you are buying in a condominium complex.

Simple.

Except for one thing: What does the lender consider to be your gross monthly income?

Here’s a little help if you’re trying to calculate your gross monthly income. But if you are serious about putting in an offer on a home, there is no way a seller or your REALTOR® will trust your own calculations. In this market, if you’re using a mortgage, you will be required to talk with a lender who will sign off on your math ahead of time.

If you are employed and are paid a salary then you take your gross annual salary and divide by twelve. This is your monthly income.

If you are paid a bonus annually – you take the last two years’ amounts, add them together and divide by 24. Unless your most recent year’s bonus is less than the one you got two years ago – in that case, you take the last year’s amount and divide by 12.

If you earn overtime, consider ignoring it when it comes to setting your personal budget. But if you need to include it to qualify for the mortgage, then it must be increasing from year to year and then you take a 24-month average of the amount of overtime you earned.

Commission-type income must be taken as a 24-month average as well and can be used only if the income is increasing over the past two years. Under certain circumstances, declining income may be used, but only the lower of the two years is used in the calculation. Tax deductible expenses that are deducted on the person’s tax return (form 2106) must be removed before calculating the “gross taxable income.”

Self-employed borrowers must be able to show two years of income as well. We must see an increasing income pattern in most cases. Depreciation can be added back into this number. I cannot stress enough the importance of working with a knowledgeable loan originator if you are self employed. Your income must be calculated accurately up front or even the most well-qualified borrowers can find themselves with a difficult situation during the loan process.

For bonuses, overtime, commissions, and self-employment income, the borrower must have been in the same exact job for the past two years. You can’t move from GM to Fiat for example and average the last two years’ overtime over two separate employers.

Rental income from a tenant can be added in at 75% of the amount of the rent once there is 12 months of history of the tenant paying on time. We can also use the schedule E of a borrower’s tax return to verify rent – this takes the income from tenants and subtracts the expenses from that investment property. The net income on schedule E can be used after one year of having received the rent. Depreciation again is a non-cash expense and can be added back to net income.

Fixed income from settlements or awards, like child support and disability, pension or social security income, is all usable income. We use the full amount as gross monthly income so long as it can be proven that there are three years left for child or spousal support payments. There must be at least 12 months of proof that the payments have been received.

The above list is not meant to be exhaustive but instructive. Calculating income correctly for a lender is no easy task. Take this seriously and work with a qualified lender ahead of time.

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