Archive for June, 2010

Type of income and prequalification

June 29, 2010

“Why does it matter how I’m paid as long as I get paid?”

I’ve received that question numerous times over the past several years being in the mortgage industry. The question does make sense – as long as income from a job is coming in on a regular basis, why does it matter if someone is self- employed, a W2 employee, or a 1099 contract worker?

Unfortunately, for the self-employed or individuals paid on a commission or bonus structure, it does matter. Why? Due to the up-and-down nature of running a business or income based on monthly/annual performance, underwriters want to see a historical record of income that is earned over the course of up to two years.

Unless you are a W2 employee whose salary will be the same every month regardless of the economy or sales, the only way to document your income is through annual federal tax returns. By reviewing tax returns for the past two years, an underwriter can see documented monthly income for 24 months to gauge expected future income.

Here are some examples of different ways one might be paid and what steps are necessary to document the income:

  • W2 salaried income – this is the easiest to document. All that is needed is the past 30 days of pay stubs. If recently moved to a new job in the same field still as a W2 employee, a pay stub reflecting 30 days on the job with an acceptance letter to the new position should do it.
  • W2 base pay with commission/bonus income – if commission/bonus income is less than 25% of the total salary, then the same rules apply as above should apply. If more than 25% of the total salary, then up to two years of tax returns will be required to document the income.
  • Full commission income – up to two years tax returns will be required. Note that any business expense write offs on the tax return will lower the income that can be used to qualify you for the loan.
  • Self-employed – two years of tax returns will be required. Again, any claimed business expenses (personal or for the business itself) will reduce the income that can be used to qualify you for the loan.
  • Bonus income – two years documented bonus income will be required along with documenting its continuance.
  • Same job at the same company but change from W2 salary to commission/bonus income – This is happening more frequently in the business world. Positions that were once salaried are becoming positions with base pay plus commission. If the base salary is sufficient to qualify for the loan, then only pay stubs are required. However, if the commission is also needed to qualify for the loan, then up to two years of tax returns would be required.

Loan programs such as stated income and no documentation loans are no more due to the credit crunch. This means all income must be verified and documented – making how one gets paid all the more important.

If you are looking to buy a home or refinance an existing one and you are not paid as a W2 salaried employee, it is imperative to speaking with a mortgage consultant to ensure everything is order before you are ready to make an offer. If you are in the state of Georgia, I would enjoy the chance to review your situation and help qualify you to buy a home–give me a call!

An old wives’ tale comes true

June 24, 2010

I’m sure you’ve read or heard about things not to do when trying to get a mortgage that could disqualify you from buying or refinancing a home. You know what I’m talking about – a story that happened to someone somewhere, but could never happen to me…

I remember hearing a story of a couple that bought two luxury cars days before closing on their new home. Long story short – they no longer could buy the home!

Now it is doubtful that many of us would go out and buy one (let alone two) luxury cars right before closing. But that old wives’ tale may be coming true more often now than it ever has before.

I always warn my customers not to do anything in regards to credit once I’ve obtained a copy of their credit report. Don’t buy a car, don’t open a new credit card, don’t run up a higher balance on an existing credit card, don’t pay anything off or down if it isn’t needed to qualify. That advice is needed now more than ever thanks to Fannie Mae’s Loan Quality Initiative.

The purpose of the Loan Quality Initiative is to keep a close eye on any potential changes to a borrower’s circumstances from the application date to the closing date. Lenders will do this by pulling a copy of a loan applicant’s credit report up to the day of closing. This has always been a possibility – a random credit pull for quality control purposes – but now it is becoming standard practice.

If your credit report is pulled on the day of closing, and there is a credit account opened after your initial credit pull, your loan could be pulled back into underwriting to be reviewed before being allowed to close. If that happens, there will definitely be a delay in closing.

How can you prevent this from happening? Don’t do anything to your credit once you’ve been qualified for a new loan. Don’t apply for any credit, don’t let anyone make an inquiry on your credit report, don’t go out and purchase furniture or appliances on existing credit cards.

In short, don’t do anything until after you close on your loan. You’ve heard about the credit crunch, and this is simply another aspect of it. Remember this isn’t a single lender or bank’s guideline, but one from Fannie Mae. That means everyone will be subject to these new standards.

Have questions or comments? You know how to find me!

Rates holding at historic lows

June 8, 2010

Interest rates are high, aren’t they? The experts predicted higher rates by mid year, and I even mentioned that would happen here, here, here, here, here, and here (if not more). If you read those posts, you will see there were several reasons why I (and essentially everyone else) thought this would happen. These reasons primarily revolved around the Federal Reserve ending their buying mortgage backed security (MBS) bonds.

* – definitely read the first linked post to get some more background information on that program from the Federal Reserve

SO… why are interest rates at their lowest point of 2010? Why did rates not dramatically rise when the Federal Reserve ended their program of buying  bonds?

Thanks to the debacle in Europe (along with our own economy that isn’t back on its feet), investors in the US and around the world are back to buying our debt (bonds) and not those of Europe. It was the heavy investing in Europe and the Euro that caused the precipitous drop in the value of the Dollar, which motivated the Federal Reserve to begin buying MBS bonds in late 2008 and increase their value.

Why is this important? – As the value of MBS bonds rise, interest rates fall. This cause and effect pattern, heavily influenced by the Federal Reserve over the past 18 months, led us to these historically low interest rates. When the program ended this past March, everyone assumed rates would rise. Well, they obviously didn’t and there were plenty of other investors more than willing to step in and buy bonds to keep rates low!

Now for the question we would ALL love to have answered, “What’s next for rates?”

In the past when interest rates got to these low levels, they almost immediately went back up. This seemed to be the self-imposed floor. Today? Not only have rates held, but they have slightly improved. They might actually get lower this time because:

  • The US economy is definitely not back on its feet and private sector hiring is down
  • The problems in Europe are just getting started as Hungary’s credit rating was down graded and Portugal, Spain, & Italy all share similar problems
  • Analysts are mixed whether or not the bailout for Greece will actually work

Regardless of what interest rates do (and it is anyone’s guess at this point), now is the time to speak with someone to get prequalified to buy a home OR to review your current mortgage to refinance. By doing so, you would be in a prime position to take advantage of interest rates at their current levels OR ready to move at a moments notice if rates continued to fall.

If that is you, I would enjoy the chance to speak with you and get everything in order for your new mortgage.