Qualifying for a Mortgage for the Self-Employed
Many potential home loan borrowers that are self employed believe that it is much more difficult to be approved for a new mortgage if you are self employed. While it can certainly be difficult for a self-employed buyer to qualify for a mortgage, the qualifying standards for a self employed borrower and the qualification standards for a wage earner or salaried borrower are the same.
The difficulty with the approval process is not with different underwriting standards it is simply that self employed borrowers often have irregular income and unsubstantiated savings or reserves.
It is often difficult for the self-employed individual to predict cash flow and business profits on a regular basis, making a self employed borrowers income highly variable. It is that variable income that presents the biggest obstacle.
Complicating the matter even further, in the past, mortgage lenders made a whole host of mortgage to self employed borrowers that were low and no documentation loans. A large portion of these home loans have since gone into default, casting self-employed home buyers in a negative light and making mortgage lenders hesitant top offer any home loan products with additional layers of risk available to self employed borrowers.
Self-employed borrowers must demonstrate an appropriate net income before they can obtain a home loan. This guideline is no different than it is for a wage earner applying for a home loan. Standard mortgage guidelines call for verification of a two year average of monthly income.
This is true whether the borrower is self employed or not. Sometimes automated underwriting systems will require only a one year verification of income, this may be found in some case where borrowers have very high credit scores and large down payments or savings. Conditions in which a borrower has very high credit scores or large accumulated savings is referred to as compensating factors.
Two years of consistent, verifiable income can be difficult sometimes for those that are self employed, as many self-employed business owners take a great deal tax deductions each year and deduct as many expenses as they can from their gross business revenue, lowering their tax bill but also lowering their net income. This makes it hard for self-employed borrowers to show, on paper, that their business has a high earning potential or more importantly that the average of the business income actually qualifies for a mortgage loan based on the proposed mortgage payment and other debts of the borrower.
The problem with the self employed fundamentally rests the inability to produce filed tax returns that have sufficient monthly income to qualify for the home loan request.
Self-employed borrowers will generally have to provide a great deal of documentation to the potential mortgage lender to verify their income. This is because there is more room for self-employed individuals to embellish or exaggerate figures, so everything must be documented appropriately. A wage earner has less documentation to supply since the verification process is far easier as it generally involves the most recent w-2, current pay stubs and verification in writing or verbally of present employment. Clearly, that process would yield very little relevant information for the mortgage lender on a self employed borrower. In addition to standard loan paperwork, a self-employed borrower may also be required to provide the following:
Two years personal income tax returns
Two years of business income tax returns
A profit and loss statement
The following calculations are used by mortgage lenders to calculate the income of self-employed applicants – the applicant’s net income for the past two years based on the filed tax returns plus depreciation declared from the business. This gives a monthly average income that can be used to qualify for a home loan. Year to date income is measured but almost always ignored for qualification purposes as it can not be adequately verified. Expenses paid out of the business are not added back in to help increase the income, declared net income plus depreciation is the standard rule for calculating self employed borrower’s income.
If self-employed borrowers experience a great deal of difficulty when qualifying for a loan, they may consider alternative financing options other than a fully documented loan. One such option is stated income. These home loans have been sharply curtailed recently and are reserved for borrowers with excellent credit and substantial equity. Alternative documentation loans are suffering the same fate, however there are still programs available that allow alternatives such as the use of bank statements which add up the last 12 months of deposits to calculate an average monthly income.
Other options may include the compensating factors. A borrower who has limited income and therefore a high debt ratio may be able to qualify for a mortgage loan with a large down payment or large reserves after the down payment. In addition, have exceptional credit scores and limited debt outstanding will also help grease the wheels for a home loan approval.
The last resort may be seller financing. Sellers may require some credit checks, but may not require such extensive paperwork to verify income. The terms almost certainly will be less generous as well.
Though the paperwork for the self employed borrower may be more burdensome, if the income is consistent and the appropriate tax returns are used, there should be very little problems qualifying for all mortgage loan types. To check the possibility of qualifying for a home loan, a mortgage calculator can used to first calculate a two year average of monthly income and then the qualifying mortgage debt ratios. The mortgage calculator can be used to check debt ratios for a variety of home loans to see how well a borrower may meet the standard underwriting guidelines.
Home loans to purchase a property or for a mortgage refinance will have the same income qualification requirements for the self employed borrower. Good documentation is the key to a fast and painless home loan approval.
Scams with Home Loan Help
With home loan foreclosures up and consumer credit problems much more prevalent, a number of businesses have cropped up that do nothing but take advantage of homeowners that are under duress and seeking financial relief. These firms are fundamentally scam organizations. The sales pitches from these organizations can sound like a way for a home loan borrower to get out from under their troubles and their delinquent mortgage payments but often these people are in business just to take the homeowner’s money. Just plain old scam organizations preying on homeowners that have fallen behind on their mortgage payments and looking for a legitimate way out or guidance in the right direction.
The office of Housing and Urban Development has provided information on a variety of specific scams that these organizations have engaged in recently. Three scams that were highlighted include:
The foreclosure prevention specialist. With theses scams, the foreclosure specialist is far from a specialist. They are really just fake home loan counselors who charges high fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. Often, the result is that none of the actions provided by these alleged counselors will have the outcome of saving the home from foreclosure. These scams give the homeowners a false sense of hope and delay them from seeking qualified help for their mortgage loan problems. In addition to paying unnecessary fees to the scam artist or company, the homeowner is also exposing their personal financial information to a fraudster that may lead to further financial trouble.
Some of these companies involved will even use names of government programs to try and legitimacy to the scam with the words HOPE or HOPE NOW in them. These are just more refined scam artists who are attempting to dazzle and confuse borrowers who are looking for assistance from the actual assistance that can be found for free at the 888-995-HOPE hotline.
The lease/buy back scam. In these scams a homeowner who has a mortgage that is severely past due may be deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back under certain terms. Usually, the terms of the buyback in this scheme are actually so hard to meet that the buy-back becomes near impossible, which ends with the homeowner getting evicted, and the lease/buy back operator walks off with most or all of the equity in the home.
The bait-and-switch: In a bait and switch scam, the homeowner is led to believe they are signing documents to bring the mortgage loan current. Instead, they are signing a number of legal looking papers that includes signing over the deed to their home. The scam artist then sells the home and the homeowner usually doesn’t know they’ve been scammed until they get an eviction notice from the new homeowner or mortgage lender.
Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional, or a HUD approved housing counselor.
Unfortunately, during tough economic times more of these unprofessional organizations surface to make a quick a buck of those home owners that are having mortgage payment troubles and are under duress. There are a number of for-profit companies that contact homeowners that have delinquent mortgage loans promising to negotiate with the mortgage lender. While these may be legitimate businesses, they often charge you a significant fee for information and services that the homeowner’s mortgage lender or a HUD approved housing counselor will provide free if they are contacted instead.
Homeowners in trouble don’t need to pay fees for foreclosure prevention help; it is a better decision to use the money that would be paid to these organizations to pay the mortgage instead.
The office of Housing and Urban Developments reminds borrowers that if it sounds too good to be true, it may well be a scam that will damage the borrower’s credit and cost more in the long run. Working directly with the mortgage lender, home loan servicer or a legitimate non-profit organization is the best approach for troubled borrowers.
For homeowners that are unable to make their mortgage payment, don’t ignore the problem any further. The further behind in the mortgage loan payments a borrower becomes, the harder it will be to reinstate the home loan and the more likely that they will lose the house. There is a lot valuable information available regarding foreclosure prevention or loss mitigation, be sure to check that you are working with a reputable organization or directly with your mortgage lender before going forward.
Mortgages and Being a Successful Landlord
If you are ambitious, energetic, smart, and have some money and good credit, owning a rental property might seem like a great idea, but you also need a wide tolerance for the many things that can go wrong. The challenges are always there, especially if you are taking the hands on approach to property management.
There are also many legal and logistical hurdles, and you need the right accountant and lawyer to make sure you are on the right path. There’s a lot of work involved in being a landlord, and if you don’t do it right, you can end up losing money.
Mortgage loans used to acquire property for rent have a higher standard than other mortgage loans. Home mortgages for rental properties will require a larger down payment and entail a slightly higher mortgage rate.
Mortgage lenders view rentals properties or non owner occupied properties as home loans that entail a much greater level of risk. Since the risk is higher for the mortgage lender the standards to become approved for a mortgage that is used to purchase a non owner occupied property is more rigorous.
The starting point of the tighter lending standards is a larger down payment than there is on a standard owner occupied home loan. On top of that requirement, the mortgage rate will normally be at least ½ of a percent higher. The closing costs may be higher as well since non owner occupied purchases usually require more discount points by the mortgage lender. The remainder of the closing costs should be similar, only the points will be greater. Since must all home loans are initially evaluated using an automated underwriting model, potential borrowers will find that these models generally require a slighter higher credit history or credit score than the models used for owner occupied properties.
It may be useful to compare mortgage rates and mortgage costs with a mortgage calculator to see just how much the monthly mortgage payments will be as well as the true cost of t a new home loan to purchase a rental property.
Here’s a quick run-down of what every landlord needs to know regarding conditions that are not specific to the mortgage lenders.
Take care of the record keeping aspects of running your business. Open a bank account for the property and run all bills and rental income through that account. This will simplify your paperwork come tax time.
Finding good tenants will at times be the most time-consuming part of your business. It’s tempting to rent to friends, friends of friends, or relatives, and that can become complicated, especially if you are a bit of a soft touch and are the type of person who is willing to help folks out. This isn’t the place for that.
Think of a tenant as a kind of business partner, someone you can rely on to do their part. Check their references (speak with their previous landlords), pull their credit report and consider running a background check. The National Tenant Network and Registry SafeRent sell credit reports from the three major credit bureaus (Experian, Equifax and TransUnion), as well as more in-depth tenant reports including an eviction judgment check, a criminal report, and verification of employment and landlord references. A modest investment can get you very useful information.
Beyond that, manage your tenants professionally. Don’t become too personally involved. Cleaning up messes in a tenant relationship can be costly, time consuming, and maddening. Be firm but fair with them and they will respect you. Be tough and strong willed, and demand that they meet their obligations.
The building itself can be trouble too, hopefully not but be prepared. If you can’t or won’t pay someone else to repair problems or do standard maintenance, you’ll get used to calls from tenants at all hours complaining of pests, broken pipes, clogged bathtubs, exposed electric wires and other common problems. You need to be handy, or be willing to pay someone who is. A reliable handyman or woman is your best friend.
You should also be aware of your rights as a landlord. Normal wear and tear is something you have to pay for, but you shouldn’t have to pay for deliberate or extremely negligent damage.
You always must be prepared for the worst because even in the best of situations you will have tough days. Talk to other landlords, or join a local landlords group. People with experience have a lot of good advice to go along with some horror stories. Some will recommend that you budget for only ten or eleven months rent to cover eventual late rent or vacancies. Others will make you aware of federal and local laws that protect the rights of tenants. Here are some of the common issues that landlords must pay attention to.
Discrimination
Make sure you have legal reasons to reject an applicant, or you risk getting sued for discrimination. For example, you can’t reject an applicant solely on the basis of his or her race, color, religion, national origin, family status, gender, disability or handicap. You are allowed to refuse renting to tenants with pets or applicants who have previous bankruptcy filings, insufficient income, or lack positive references from previous landlords.
Steering
Steering is encouraging a potential tenant to take one apartment over another. Landlords can easily do this even if their intention is innocent. A landlord who says to a single mother with a teenage daughter, ‘You should take the upstairs unit or the unit in the back’: that’s called steering and it’s illegal. The landlord may have had the best of intentions but under federal and state law he or she has to allow the tenant to choose the unit they want among those that are available.
Security Deposits
One of the most common cases handled in small claims court is a landlord-tenant dispute over a security deposit. Have a clear written agreement that spells out how the security deposit works, and make sure that you are following the law. Some states limit the amount of the deposit you can collect or require you to hold it in a separate account that accrues interest. Generally, landlords can use the deposit for unpaid rent and repairs that are beyond normal wear and tear, but there may be additional state-specific limitations.
Insurance
Whether you rent out a single-family home to one tenant or an entire building with dozens of apartments, you need separate homeowners insurance for your rental properties. This type of insurance can be expensive and you should understand the costs before investing. The more units you rent and the more people there are, the more risk you have, and insurance companies will make you pay for that.
In today’s litigious climate, make sure you have enough liability coverage. If your tenant’s dog bites your neighbor’s child, they’re most likely to go after the tenant but if there’s some negligence on your part they may go after you.
Professional Management
If your finances allow it, property-management companies can do most of the heavy lifting for you. They market the property, maintain it, screen tenants, collect rent, pay the bills, prepare financial statements for you and keep up with the fair housing laws. Management company fees can be up to 10% of the rental income. If you live far from the rental property), for example, you may need a management company to run your business. You might also be better off with professional help if you aren’t especially handy or if you find that being a landlord is taking you away from your job or personal life.
Getting your business off the ground will involve some paperwork other than handling the mortgage lenders requirements. Some states require that you get a business license for your property in order to rent it out. First-time landlords should consult with a real estate attorney and a certified public accountant (CPA) before getting started. A CPA can help you figure out how much rent you should charge in order to make your business profitable, while an attorney can be priceless as you learn the intricacies of the fair housing laws, among other legal issues.
Using a Mortgage Loan for Debt Consolidation
Cash out refinance transactions for debt consolidations is a popular mortgage transaction. Cash out refinances represents a large portion of mortgage refinance transactions each year. For consumers that own a home and have a fair amount of consumer debt, a cash out refinance for debt consolidation purposes is well worth considering.
Sometimes a person can get into debt problems without much effort at all. Perhaps you have even experienced credit problems and are showing various signs of damaged credit do the debt overload. If you are willing to be disciplined, in a serious fashion and you own a home, one way out may be a cash out refinance to consolidate these debts. This may help you solve your credit and debt situation despite some of the inherent risks involved with such a home loan.
It may be possible to refinance your mortgage that you currently have with a loan amount greater than the existing loan balance. This is called cash out refinance. The extra money obtained from the new refinance transaction can be used to pay off other bills and debts. A cash out refinance for debt consolidation loan gives the home loan borrower money to pay off their existing debt, resulting in just one monthly payment and quite possibly a lot less stress. With discipline, this home loan makes it much easier to manage your budget since you only have to worry about a single monthly mortgage payment schedule. This type of refinancing option means you will pay a longer term and subsequently more mortgage interest over the life of the debt.
When applying for refinance for debt consolidation, make sure you explain this to the mortgage lender and loan officer. During the qualifying process for a refinance, the debt ratios the mortgage lender will evaluate are as if the new mortgage loan is in place. When this mortgage loan is for cash back to pay off consumer debt the application will not consider the existing payments of the debt being paid off to calculate the debt ratios.
The three key factors in evaluating your loan request will be the debt ratios, the loan to value and your credit report. In order to make sure the debt ratios are not excessive, it is important that the mortgage loan application does reflect the debts to be paid off otherwise the home loan application could result in a loan denial for an excessive debt ratio.
When you consolidate various high interest rate debts into one mortgage loan the results can be very attractive and appealing. With a debt consolidation mortgage, you do not have to pay different interest rates to creditors, or pay your creditors at different times of the month. A debt consolidation mortgage refinance combines your debts into one loan payment a month, one that you should be more manageable.
Since mortgage loans are secured by real estate, the interest rate or mortgage rate is generally much lower than that of credit cards and personal loans. And in most cases, the interest paid on a mortgage is tax deductible. With discipline, you can now budget better to increase savings or prepay on the new refinanced mortgage and extinguish all of your debt early.
Be careful; do not use the freedom of lower monthly payments to avoid getting your financial house in order. Do not increase in your unsecured debt after you consolidated through a mortgage refinance. Pay strict attention to your financial outlays and use the home loan to improve your financial health.
Benefits of a cash out refinance for debt consolidation include:
The ability to take all different types of high interest loans and combine them into one lower interest mortgage when you enter into a refinance. This pays off the higher interest debts.
Improves your credit rating by reducing the amount of outstanding debts per account.
Most mortgage loans allow prepayment without penalty, allowing the borrower to have the option of not only consolidating many consumer debt payments into one but also to pay a higher monthly mortgage payment if they choose and reduce the total debt early.
By paying off debts that may have been outstanding, you stop and eliminate debt collection activities, foreclosure, bankruptcy, and other potential negative actions that affect your overall credit status.
The process to get a debt consolidation mortgage is fairly simple. Research and shop around for repayment plan that meets your budget and risk, and find the lowest mortgage rate and closing costs that you can. Be cautious before signing anything and make sure you understand all the repayment terms, mortgage rates, and costs of the refinance transaction. Use the mortgage calculators to evaluate the mortgage rates and mortgage payment options.
Using a cash out refinance mortgage for a debt consolidation can make sense, and help overcome severe debt problems, but it does result in higher interest and higher fees. It will take discipline to make sure the new payment amount is handled in a timely fashion. You will have a longer mortgage term and pay more over the length of the loan. It is often smart to restructure your debt this way, but this does result in a larger single debt amount. For this reason it’s smart to investigate shorter-term mortgage options to try and avoid paying a larger amount of money over time.
Home Loan Delinquency and Foreclosure Help
The mortgage foreclosure pandemic has not yet abated. While investors talk about a rebounding stock market 1000’s of new foreclosure filings continue to be processed.
For some home owners the foreclosure process can be a bitter end to poorly fitting monthly mortgage payment. In these cases, the mortgage amount and monthly commitment probably never matched the household income. Servicing the mortgage payment combined with the new homes expenses and recurring monthly living expenses was a budgeting nightmare the day the mortgage loan was signed. But for others, the late mortgage payments and impending foreclosure are not a product of risky lifestyle decisions and too much consumption but standard income stresses like the loss of a job, divorce and unexpected financial calamities.
The economic crisis has made it hard for a number of homeowners who were not having trouble in prior months finding it hard to now make ends meet. For some of these people who were finding it difficult to make their mortgage payments, they have been able to save their home from foreclosure. For those borrowers who do nothing, they could lose their home if they continue to ignore the problem and do nothing
If you are having trouble making your payments, sift through the mess to understand what the underlying financial problem is and seek help sooner rather than later. The longer a home loan borrower waits to call, the fewer options they will have.
One of the first steps to make in times of financial distress and when experiencing payments problems is to analyze your monthly expenses and income and to see where savings can be made. Dramatic savings made have to made, if necessary. As your try to fix the household budget leaks, make sure to understand then consequences of mortgage payment delinquency and the foreclosure process so you know what you are up against if you can not realign your budget.
Review the mortgage loan contract you signed when your mortgage lender loaned the money necessary to buy the house or more likely, the last home loan refinance transaction since that will be the mortgage that is secured against the house. The mortgage loan agreement will cover the terms under which you agreed that if you can’t repay the home loan, the mortgage lender can foreclose to take ownership of the house. If you do not pay your monthly mortgage payment, you are technically in default on your mortgage.
State laws vary, but generally, a mortgage loan that is as little as 90 days delinquent can be considered in foreclosure and the process of foreclosing on the home may begin. Your mortgage lender may send a notice indicating that they are starting foreclosure proceedings, but a homeowner should not wait fro this document to arrive. It is important to take steps to prevent a foreclosure as soon as you realize you are having trouble paying the monthly mortgage payment.
The good news is that there has been a tremendous amount of pressure applied to banks and mortgage lenders that originate and service mortgage loans to take prudent attempts to find solutions for homeowners having trouble making their mortgage payments. Contact your mortgage loan servicer (the company that collects your monthly mortgage payments) to discuss your options as early as you can. Many home loan servicers are expanding the options that have made available to their borrowers. It is certainly worth calling your mortgage loan servicer even if you had a request that was denied in the past. Mortgage loan servicers are getting a tremendous amount of calls from distressed borrowers. Be persistent and try to be patient but by all means find out what your home loan lender or servicer can do for you.
While you will want to discus any and all options the mortgage lender may have, one option that is being sponsored by the present administration is home loan modifications. Many home loan servicers implemented new loan modification programs in 2009 to assist homeowners experiencing financial difficulties by lowering their monthly mortgage payments. Plus, many home loan servicers are participating in the government’s Making Home Affordable Program as well as working with non-profit counseling agencies through HOPE NOW.
In a mortgage loan modification, the home loan servicer and the home loan borrower agree to permanently change one or more of the mortgage’s terms to make the monthly mortgage payments more manageable for you. The changes could include reducing the mortgage rate, extending the term of the loan, creating a forbearance on the past due interest or forgiving principal, or a combination of these factors.
With the government sponsored loan modification program in order to be eligible, the home must be the primary residence, the mortgage loan balance must be no more than $729,750 for a single-family home, the monthly mortgage payment (on a first mortgage) must be more than 31 percent of the borrower’s gross monthly income, and the homeowner must either be having trouble meeting mortgage payments or be at serious risk of falling behind. Don’t worry if you had a bankruptcy filing, this does not automatically disqualify a homeowner from participating in a loan modification program.
With this program, the participation of home mortgage lenders and home loan servicers is voluntary. However, the U.S. Treasury added incentives to mortgage loan servicers to modify loans to make them affordable. Part of the program includes the ability to reduce the mortgage rate to as low as 2 percent, and next, if needed, to extend the length of the loan to 40 years. If that isn’t enough to make the mortgage loan affordable, the home loan servicer may defer repayment on a portion of the mortgage loan, which may result in a large balloon payment that will be due at the end of the home loan term. Another option under the home loan modification program is be for the home loan servicer to forgive some of the loan principal, but technically there is no requirement for the home loan servicers to make the concession.
If the mortgage rate is modified under the program, the modified interest rate will remain in place for five years, and then it will increase gradually by up to one percent per year until it reaches a cap prescribed by the program.
The web site www.makinghomeaffordable.gov provides homeowners with detailed information about the programs. The Web site can help home loan borrowers determine if you may be eligible fro the program, but be aware that even with government pressure, only the home loan servicer of your loan can tell you if you qualify.
In general, you may qualify for a loan modification under the Making Home Affordable Modification Program (HAMP) if: your home is your primary residence; you owe less than $729,750 on your first mortgage; you received your mortgage before January 1, 2009; your monthly payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) is more than 31 percent of your current gross income; and you can’t afford your mortgage payment because of a financial hardship, like a job loss or medical bills.
If you meet these qualifications you must contact the mortgage loan servicer. Once you start communication with the mortgage loan servicer you will need to provide some documentation for the mortgage servicer or mortgage lender that may include: information about the monthly gross (before tax) income of your household, including recent pay stubs, your most recent income tax return, information about your savings and other assets, your monthly mortgage statement, information about any second mortgage or home equity line of credit on your home, account balances and minimum monthly payments due on your credit cards, account balances and monthly payments on your other debts such as student loans or car loans and a completed Hardship Affidavit describing the circumstances responsible for the decrease in your income or the increase in your expenses.
The government has also sponsored a program called the Home Affordable Refinance. This part of the program is intended to help homeowners who have been unable to refinance into mortgages with a lower mortgage rate because their homes have decreased in value.
In general, to qualify for a mortgage refinancing under this program, homeowners must have an existing mortgage owned or guaranteed by Fannie Mae or Freddie Mac (government-sponsored enterprises that help ensure funds are available for home buyers at affordable interest rates), be current on their mortgage, and have a first mortgage that does not exceed 105 percent of the property’s current market value.
The interest rate and any refinancing fees will be set by each mortgage lender. It will be necessary to call your mortgage lender or home loan servicer to find out if your loan is eligible. For those home loan borrowers who already know that their mortgage loan is held or guaranteed by Fannie Mae or Freddie Mac, these organizations can be contacted directly at 1-800-7FANNIE or 1-800-FREDDIE to see if you qualify for this program.
The bottom line is that homeowners who currently have a hard time making their monthly mortgage payments should contact their mortgage loan lender or mortgage loan servicer or a reputable counseling agency as soon as possible to discuss options. Home loan borrowers who are in distress should also be very careful in dealing with organizations that encourage borrowers to cease making payments or walk away from their home while also promising to repair their credit.
Here is a partial list of mortgage foreclosure prevention resources:
Government Mortgage Modification Programs:
Making Home Affordable
www.MakingHomeAffordable.gov
www.FinancialStability.gov
Hope for Homeowners (H4H)
http://portal.HUD.gov
(800) CALL-FHA or (800) 225-5342
Foreclosure Assistance and Counseling:
U.S. Department of Housing and Urban Development (HUD)
www.HUD.gov
www.HUD.gov/offices/hsg/sfh/hcc/fc
(800) 569-4287
Homeownership Preservation Foundation (HopeNOW)
www.995hope.org
(888) 995-HOPE or (888) 995-4673
NeighborWorks America
www.FindaForeclosureCounselor.org
www.NW.org/network/home.asp
FDIC Foreclosure Prevention Website
www.FDIC.gov/foreclosureprevention
(877) ASK-FDIC or (877) 275-3342
Home Mortgages and the 4 C’s of Lending
All you need to do to make sure you have a better success rate in getting your home loan application approved at the terms you want is education and preparation regarding the process the lenders go through to approve your request. When evaluating your request for a mortgage loan, a mortgage lender will assess the application you have filled out with the supporting documents you have submitted. This process is referred to as underwriting the home loan. During this stage, the mortgage lender investigates the integrity of the data and evaluates the risks in order to qualify the applicant.
The home loan application is a summary of your assets, credit and income position at this particular point in time. It does not measure your character nor does it measure potential future changes such as potential employment changes or debts that maybe incurred or satisfied.
In order to evaluate your present position the mortgage lender will review your financial position, take inventory of your assets, income and credit profile. This procedure is accomplished by verifying your employment, verifying the funds you have on deposit with financial institutions, verifying the equity in the home by appraising the property, reviewing your debts outstanding and analyzing your credit history. This process has become highly automated with computer modeling and approvals but the underlying process is basically the same.
These criteria that are evaluated were once referred to as being the four C’s of lending or collateral, capacity, credit, and character.
Collateral - Collateral is a measure of the value, condition and marketability of the property. The mortgage lender will order an appraisal to determine the market value of your home. From here the loan to value or equity position in the property is determined. Loan to value is the ratio of loan amount to the appraised value. If the borrower is agreeing to down payment of $10,000.00 on a $200,000.00 home, the loan to value will 95%. This formula works on the refinance as well. If a borrower wishes to refinance an amount of $100,000.00 on a $200,000.00 home, the loan to value will be 50%. Loan to value (LTV) and the appraisal are the biggest factors in measuring collateral. Lower loan to values leave more equity in the property and is inherently less risky for the mortgage lender since it not only cushions the mortgage lenders risk but leaves more at stake for the borrower.
Capacity - Capacity is short for capacity to pay. In regards to mortgage qualifications the capacity to pay is measured by housing and debt ratios. The mortgage lender will ascertain the borrower’s gross monthly income first. The new housing payment on the mortgage requested is calculated as well as a summary of all contractual debt payments. Capacity is then measure by dividing the monthly mortgage payment by the gross monthly income to obtain the housing ratio and then dividing all contractual debt payments by the gross monthly income to get the total debt ratio. For example, if the total obligations of the borrower were $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the housing ratio would be 25% ($1,000/$4,000 = 25%) and the debt ratio would be 35% ($1,400/$4,000 = 35%). Lower housing and debts imply greater capacity to pay a home loan back and hence lower risk.
Credit - Credit is evaluated by reviewing the credit report and the credit score. With the use of credit scoring, credit evaluation has become one of the simplest attributes of a loan request to measure. The credit is broken into three primary categories. Mortgage lenders will use credit scores, known as FICO scores, to determine the overall credit risk of the home loan borrower. From here a review of the public records such as, tax liens, bankruptcy filings, and judgments will be assessed. Finally, the individual accounts or trade lines in the credit report will be reviewed for delinquency, credit amounts, depth and length of time on accounts. Generally speaking, the higher the credit score the better the credit risk.
Character - Character is a qualitative measure of a borrower’s stability, integrity and honesty. Measuring character was mostly a measure of a borrower’s commitment to their credit and the new debt they intend to take on. Character may be classified as a measure of responsibilities with the loan commitment. Since mortgage lending and underwriting is almost entirely based on quantitative analysis, character is predominantly ignored. Since it is difficult to evaluate the risk and to even measure a borrowers character, in residential mortgage lending this gauge is rarely used.
Qualification for most mortgage loans and the mortgage rate a lender will charge depends on these three main factors. Understanding the basic guidelines and having knowledge of what a mortgage lender looks for in analyzing your loan request will make your mortgage application and homeownership experience and far smoother and less nerve racking experience.
Mortgages and Yield Spread Premiums
Abusive lending practices and an uproar over deceptive sales practices in the mortgage industry often focuses on unscrupulous tactics regarding mortgage rates and closing costs that are exploited by loan officers and mortgage lenders. One such aspect of mortgage lending deceit involves the disclosure of the yield spread premium on the good faith estimate and settlement statement for a home loan.
The issue was addressed once again when the Federal Reserve Board (the Fed) adopted a number of new rules that involve certain prohibitions regarding good faith estimates regarding mortgage rates and closing costs and for mortgages made on or after October 1, 2009.
These new rules which are a combination of the rules adopted by the Fed and others from the U.S. Department of Housing and Urban Development (HUD) ensure that consumers receive mortgage loan good faith estimates of the costs of a mortgage earlier in the mortgage application process and that the disclosures better explain the costs of the home loan and terms of the loan. The disclosures will cover areas such as the potential for monthly mortgage payments to rise, any prepayment penalty the mortgage loan may have for paying off the loan early, and any fees that may be paid by the mortgage lender to a mortgage broker for originating or bringing in the loan business. This last aspect is what the industry refers to as the yield spread premium.
Yield spread premium disclosures apply mostly to mortgage brokers but in certain cases it may also be a requirement for mortgage lenders or correspondent lenders as well.
A yield spread premium (YSP) is a payment the mortgage broker may receive from a mortgage lender when they sell or deliver the mortgage loan to the lender. A mortgage broker’s job is to facilitate the origination and processing of a mortgage loan. The mortgage broker may close the home loan in their name but ultimately the loan is funded by a mortgage lender. The mortgage lender pays the broker the difference in the mortgage rate and points that are required by the mortgage lender to fund or purchase the loan and the mortgage rate and points charged to the home loan borrower by the mortgage broker.
Technically, the yield spread premium is the dollar value of the difference between the lowest interest rate a wholesale mortgage lender would have accepted for a given mortgage loan transaction and the mortgage rate a mortgage broker induces or sells the borrower to agree upon. The greater the spread between the two mortgage rates, the higher the yield spread premium payment to the broker.
As an example, if a mortgage broker handles a borrowers request for a home loan with a rate of 5.5% and two points and the mortgage lender agrees to fund that same loan at a mortgage rate of 5.5% and 1 point, the difference between the two points charged and the one point the mortgage lender takes to fund the loan has is the brokers compensation or profit. Often the difference involves the mortgage rate and/or the points charged.
When the mortgage rate quoted by the mortgage broker is higher than the mortgage rate agreed to be the mortgage lender, the difference is the compensation to the broker which is referred to as the yield spread premium. The spread between the two mortgage rates, the rate charged the borrower and the rate the mortgage lender will agree to buy or fund the loan at, is paid as a percentage of the loan amount to the broker. If the mortgage broker quotes a very high mortgage rate of 6.50% and the mortgage lender is willing to fund or buy that same loan with a rate of just 5.00%, the yield spread premium would be very high. That is an extreme example that would not often be done. However, yield spread premiums are often a considerable amount of the mortgage broker’s income.
Many critics of the mortgage industry have charged that yield spread premiums amount to kickbacks that give brokers and other loan originators financial incentives to steer consumers to higher rate home loans. Clearly the federal government believes there are abuses with yield spread premiums as evidenced by the new disclosure rules and in fact, the issue of abuse in yield spread premiums and proper mortgage rate and cost disclosures is a topic visited by the federal regulatory agencies as well as state regulatory agencies in the mortgage lending industry regularly.
Mortgages from the Dark Side, the Rebellion has Started
The trouble in the mortgage lending industry was first revealed to me shortly after accepting my first job in finance. Upon graduating college with a finance degree I took the first finance job available. Since I had bills to pay and the job market was weak I took the first employment opportunity offered. The job was an assistant finance manager at a local finance company not far from my apartment. The company was engaged primarily in the origination and collection of personal loans and mortgages, mostly second mortgage or home equity loans. This finance company was a division of what is now the eight largest bank in the nation. Not the best job but far from the bottom.
Shortly after the training concluded, I learned that there were three activities you took part in at the finance company. You sold the consumer loans, you closed loans and you collected the loans or the payment on the loans. We ate lunch and used the facilities too, but other than that we sold loans, we closed on the loans and we collected the loans. The reason we spent so much time collecting loans was that the delinquency rate at finance companies is fairly high and it is necessary to stay on top of the customer in order to make sure the client makes timely payments.
Nothing overtly wrong with these lending activities. Except, there were at least two glaring immoral deeds that we committed. One was that we spent a third of our time on the phone selling loans. Let me shed some more light on what I did. I was on the phone selling loans to your neighbors constantly. These sales calls had a strong pitch and were performed with unrelenting tenacity by myself and peers in the industry. Sure it was a fairly high interest rate since this was a consumer finance company and we did not offer the most competitive interest rates and your neighbor really didn’t need to be bogged down with more debt, but I was selling money. I sold a consumer loan, either a personal loan or second mortgage to help your neighbor buy a new car, go on a family vacation or maybe even consolidate debt.
It isn’t necessarily cocky to tell you your neighbor didn’t stand a chance. I sold the low monthly payment, hell I couldn’t sell the outrageous interest rates, I sold the neighbor how he can use this money for the vacation his wife and kids deserved, I sold an escape, a low monthly payment escape that your neighbor was entitled to. He didn’t stand a chance; he couldn’t say no. He took the loan. I wasn’t going to let home say no. Sometimes that took 10-15 phone calls until they said yes.
Once I closed the loan, which is lending speak for having the customers execute and sign the appropriate loan documents and disclosures, and some timely monthly payments were made, I picked up the phone and sold your neighbor more money. I sold the benefits of refinancing and taking out more cash on top of the existing loan so he can finish the patio and buy the new grill and eat some tasty USDA prime rib eyes. He went for it. Hey, he didn’t stand a chance, I was good at it, and we were selling money.
Sales rule number one in most businesses is that the present customers and former customers are your best candidates for additional sales, in our case that would be additional loans or larger loans to the existing accounts.
After a few years or even one or two years, I may have refinanced this customer three times and elevated his debt load significantly. Eventually, this loan and the other debts your neighbor has are killing him. He can’t make all the monthly payments. His wife is now pissed given that she can’t use her credit card at the grocery store since the credit card limit has been reduced because they can no longer make their payments on time. And after numerous sleepless nights, the neighbor finally decides to go for a fresh start and files bankruptcy.
This is a situation I witnessed every year in consumer finance and mortgage origination’s, equity extraction with first mortgages and home equity loans as well as consumers loans and excessive credit card use was letting consumers live well beyond their means. These individuals and families were making $75,000.00 ( as an example ) and when I would pull their credit report one year later they had an additional $15,000.00 in debt. That doesn’t sound crazy at first except you have to consider that these are mature workers who are not likely to be looking at large pay raises in the foreseeable future. So, Mr. & Mrs. Jones are making $75,000.00 and I add their new debt and it appears they are spending $90,000.00.
The easiest solution for them was to incur more debt with a home equity loan or mortgage refinance and keep the party going, never paying attention to the fact that they spend more than they make almost every single month of the year. And this was common.
Eventually, the music stops and these people can no longer borrow more money or consolidate what they have to a lower payment and it times to pay the piper. Their house of cards built on easy money comes to end with bankruptcy, foreclosure and other unpleasant outcomes. Some customers run to file bankruptcy to eliminate these consumer debts or create a new manageable payment plan, but most of my customers agonize for months over the thought of bankruptcy. It tears their family apart and it weighs them down terribly.
The company I work for has a position on bankruptcy that is similar to most mortgage lenders, banks and credit card companies which is that bankruptcy is evil and should be restricted. At the Dark Side Lending Company, we even attended the bankruptcy hearings. This is a very uncommon practice. Chase Bank, Chrysler Financial, Countrywide, none of these creditors would normally attend a personal bankruptcy hearing. We do, basically to shame the customer into making payments or reaffirming the debt with us.
There I am, the man who may be the most responsible for driving this family into bankruptcy because of my sales skills and the incredible marketing support of Dark Side Lending. Boy was I ashamed. I see this family in bankruptcy court and my heart falls into stomach. I can recall all the sales calls I made to them over the past couple of years. Not a few sales calls, but sales calls every other month, every year. Telling them how great it would be to take another loan.
I wake the next morning and do this all over again. Over sell the loans, close on the new loans and collect the payments one way or another. It got to the point where I took a shower before I went to work and I took a shower when I get home to clean the filth of the industry off of me. A practice I repeated at various lending institutions I worked at for the next twenty years.
These families, your neighbors, which are struggling with payments for a whole host of reasons one of which is because I sold home loans they could not afford. Sure they had responsibility. But, I can not emphasize enough, I am good at my job. I can sell loans. You don’t stand a chance, you try to say no but I’ll get you eventually. And it wasn’t just me. Lenders whether they are mortgage lenders, banks or credit card companies across the nation market and advertise in the mail, on the phone, on the Internet on prime time TV and late night TV. You can’t escape the marketing muscle of the Dark Side of Lending.
One day when I was watching the Bears play with my dad and we had a discussion on consumer debts and bankruptcy. At this time, one of the bankruptcy reforms bills was working it way through congress. During this discourse I told him that bankruptcy statues exist because of me. After he laughed for quite some time, he asked for a little elucidation on that statement. I explained that consumers file bankruptcy because of sales men, or finance managers like me who shove these loans down the consumers’ throat and bankruptcy is a necessary evil to even the field against the marketing muscle of the Dark Side of Lending. I assure you the force on the Dark Side is strong.
Why do we have bankruptcy reform to make it harder for the consumer to escape the likes of me, it’s simple. The banks fill the congressional coffers with cash. Oh yeah, the other side of the story is that somehow congress thought bankruptcy reform was good for the nation and the American people. Wow. How is that possible?
Ever since that time, if a friend or a friend of friend asks me about filing bankruptcy and the impact on their credit, etc…my reply is always the same, file and file often. Stick it to the lenders. Run the credit card up and file bankruptcy. It’s your duty as a citizen to make up for all the misdeeds performed by consumer finance companies, mortgage lenders and credit card companies by wiping out the debt and handing a loss to the lenders and bankers.
This was a start of long career working with the Dark Side of Lending. This was just the beginning.
Mortgage Lender East West Bank
East West Bank is one of the largest independent commercial banks headquartered in Los Angeles. The bank provides a wide range of personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and other individuals.
East West Bank has 69 branches in California located in the following counties: Los Angeles, Orange, San Bernardino, San Francisco, San Mateo, Santa Clara and Alameda. In addition, the bank has one bank branch in Houston, Texas.
The bank offers a broad range of products designed to meet the credit needs of its borrowers. The bank’s lending activities include residential single family loans, residential multifamily loans, commercial real estate loans, construction loans, commercial business loans, trade finance loans, and consumer loans.
East West Bank offers a variety of mortgage loans. The bank originates mortgage loans to purchase a new home or refinance an existing home. East West Bank’s mortgage rates and fees are highly competitive.
The bank offers both fixed and adjustable rate (“ARM”) single family residential mortgage loan programs. The bank’s ARM loan programs have six-month, three-year, five-year, or seven year initial fixed periods. We originate single family residential mortgage loans
The bank also offers both fixed and adjustable rate multifamily mortgage loan programs.
The underwriting criteria for the mortgage loans generally include minimum FICO scores, maximum loan-to-value ratios and minimum debt coverage ratios.
Current mortgage rates and mortgage loan terms from East West Bank include the following:
30 year fixed rate mortgage with rate of 5.250% and 0.625 points with an APR of 5.446%
15 year fixed rate mortgage that has a rate of 4.625% and 0.625 points with an APR of 4.946%
For more flexible underwriting to meet special borrowing needs, the bank offers some portfolio home loan programs including:
6 month adjustable rate mortgage with a rate of 7.000% and 1.0 point and an APR of 8.107%
3/1 ARM with a mortgage rate of 6.625%, 1 point and an APR of 6.773%
Mortgage rates subject to change and require loan approval. Standard conditions mortgage loan and mortgage rate conditions include: the property is a single family used as your primary residence, except for the multi-family product which assumes a non-owner occupied residence. The property for the mortgage loan is located in California. The down payment towards the property is 25%. Income and assets are documented and are sufficient to qualify for the mortgage loan. There will be no subordinate financing behind the newly created 1st Mortgage. Mortgage rates and points are based on a 30 day lock period. Borrower’s credit is subject to East West Bank approval.
For current mortgage rates and account details contact a bank representative at 888-895-5650. Mortgage rates and additional mortgage loan information is also posted online at the bank website located at www.eastwestbank.com.
For CD interest rates offered by East West Bank visit, www.selectcdrates.com. For current auto loan rates from East West Bank visit, www.selectautorates.com.
Jumbo Mortgage Loans
Mortgage loans that are considered jumbo loans are those that exceed the limits that have been set by the government sponsored agencies, Fannie Mae and Freddie Mac. The Housing and Economic Recovery Act of 2008 changed Fannie Mae’s charter to expand the definition of a conforming mortgage loan. According to provisions of the Housing and Economic Recovery Act of 2008 (HERA), the national loan limit for mortgage loans to be securitized or purchased by the government agencies of FNMA and FHLMC is set based on changes in average home prices over the previous year, but cannot decline from year to year.
Fannie Mae and Freddie Mac each year set the limit on what constitutes a conforming loan, based on the October-to-October changes in mean home price following the terms set by The Federal Housing Finance Agency (FHFA). The Federal Housing Finance Agency (FHFA) has announced that the conforming loan limit will remain $417,000 for 2009 for most areas in the U.S. but specified higher limits in certain cities and counties. The conforming loan limit is the maximum size of loans that Fannie Mae and Freddie Mac can purchase in 2009. The high cost areas are determined by the Federal Housing Finance Agency.
Every year the limit is reset to a new number in the month of January, while the numbers are constantly changing on a yearly basis, one of the most recent updates disclosed that the maximum loan amount is $417,000 for condominiums and single-family homes. Once your loan has exceeded this pre-set limit, you are no longer applying for a standard loan or conforming loan, but rather, you have moved into the jumbo loan category. The 2009 general conforming mortgage loan limits are identical to the 2006, 2007, and 2008 conforming mortgage loan limits.
The reason why some people need a larger home loan does not always mean they are seeking out the biggest and most expensive houses to live in. There are some parts of the country where starter homes can cost more than $500,000. The person who would choose to purchase these more expensive homes may find that a standard, conforming loan will not be sufficient. The mortgage loan often needed to buy these higher priced homes is called a jumbo loan. Jumbo loan applications have risen measurable in recent years due to the rapid increase in housing prices.
Typically there is a slightly higher mortgage rate associated with jumbo loans. Sometimes the definition of higher mortgage rate can be staggering; anywhere from a mortgage rate that is ¼% higher to 1% higher than conforming sized home loans. This is because both Fannie Mae and Freddie Mac only buy mortgage loans that are conforming loan size, to repackage into the secondary market, making the demand for a non-conforming loans or jumbo loans much less. Since these mortgage loans are not securitized by Fannie Mae or Freddie Mac, the less liquid market for jumbo loans leads to a somewhat less uniform set of standards.
Jumbo mortgage loans have many of the same options and attributes that are available on conforming loans. They will however, all have some restrictions. The variety of home loan types is not usually as vast with jumbo mortgage loans but you will certainly find 30 year fixed rate jumbo loans, 15 year fixed rate jumbo loans, adjustable rate jumbo mortgages, and a host of hybrid mortgage loan types. All of these jumbo loan programs will feature slightly higher mortgage rates than if they were compared to national averages. The higher mortgage rates apply to both purchase transactions as well as refinances.
The qualifying requirements for jumbo home loans will also be more stringent. Required credit scores will be higher. Down payment requirements will more restrictive leading to larger down payments and lower loan to values. Financial reserves or funds that are available after the mortgage loan closing costs and down payment will need to be more substantial.
This not to say that jumbo home loans will have extremely high interest rates or a thicket of qualification requirements. It is simply that jumbo home loans have discernibly higher requirements and theta a jumbo home loan borrower should be prepared that in order to borrow much more than the standard mortgage loan borrower they will have a somewhat higher burden during the mortgage underwriting process.
When shopping and comparing jumbo loans, a prospective borrower will want to research and compare as many mortgage lenders as possible and be sure to ask about the jumbo loan mortgage rates to avoid obtaining inaccurate information. There is no point in searching for the mortgage rate and qualifying requirements on a 30 year fixed rate loan only to find out that the information you receive is for a conforming loan amount.
While these mortgage rates on jumbo loans are higher than others, once you look at all of the payment options and how this interest is distributed throughout the life of the loan, you will be able to find the home loan that fits your financial situation best. Just because you have to use a jumbo loan doesn’t mean that you have to pay a jumbo monthly mortgage payment.
Draw on the mortgage calculator to help calculate the monthly payments differences between the varying jumbo loan terms as well as the rate difference between a conforming loan and a jumbo loan to thoroughly evaluate all options. A good source for mortgage calculators can be found at www.selectcalculators.com.