Blog Category: Underwriting Rules
“No PMI” Loans Are A Gimmick! Remember in the real estate boom lenders would commonly make you a loan with a 1st and 2nd trust combined. They did this to have you avoid PMI. You could put 5% down or 10% down and still avoid PMI. These loans were called 80-10-10, 80-15-5, 75-15-10. There was even an 80-20 where you got an 80% 1st trust and a 20% 2nd trust, and put no money down! Imagine my surprise when some of these loans started to resurface recently.
Are you looking at the right things when buying a condo? Most people look at location, view, amenities, square footage, and level of finish inside the condo unit. But why get excited over a condo and put in an offer if the building is not able to be financed by a mortgage lender? Below is a list of some of the most important things that a lender will be looking for when analyzing a condo to approve a loan for a mortgage borrower.
Condo financing can be tricky, but with small 2 to 4 unit condos it has gotten easier. In some urban markets a multifamily home is converted to condominiums. For example, a duplex is turned into two condominium units. Or a triplex is turned into three condominium units. Or a fourplex is turned into four condominium units.
Every year, the Federal Housing Finance Agency (FHFA) sets a dollar cap on conventional mortgages that Freddie Mac or Fannie Mae are allowed to back, commonly referred to as a conforming loan limit. In 2020, the conforming loan limit for a single-family home was $510,400. This year, the conforming loan limit for a single-family home increased to $548,250, nearly 7.6% higher!
2023 conforming loan limits have been announced! The Federal Housing Finance Agency (FHFA) sets the loan size limits each year on conventional mortgages that Freddie Mac or Fannie Mae will buy from mortgage lenders. In 2022 the conforming loan limit for a single-family home was $647,800. This year, the conforming loan limit for a single-family home has increased to $726,200. A little over a 12% increase!
2024 conforming loan limits have been announced! New loan size limits are set each year on conventional mortgages that Freddie Mac or Fannie Mae will buy from mortgage lenders. You can see the 2023 loan limits in the chart below. For 2024, the conforming loan limit for a single-family home has increased from $726,200 to $766,550. That is about a 5.5% increase! Loan limits go even higher for 2-4 unit homes.
FHA loans are federally backed loans insured by the Federal Housing Administration. FHA loans are traditionally used by buyers who cannot come up with the larger down payments required on a Conventional loan which has a minimum down payment of 5% down on single family homes and 20% to 25% down on multi-family homes. The perception is that FHA loans are typically used more by lower to moderate income buyers, however not all buyers who use FHA are low to moderate income homebuyers.
The FHA loan program started during the Great Depression of the 1930s, when the rate of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance to encourage them to lend. FHA does not lend the money to homebuyers, they insure the lenders that lend the money against loss.
FHA loans fell out of favor during the real estate boom of 1998-2006, as sellers did not want to be exposed to the more marginally qualified buyers that were usually attached to an FHA loan, nor did they want to hassle with the more stringent appraisal requirements of an FHA loan.
However, in a buyer’s market, FHA loans are commonly accepted in most markets, and FHA loans have become a savior for many home buyers in some eras. If it were not for the FHA loan, some real estate transactions would not occur.
Well and septic inspections may indeed be required to get mortgage approval. But it depends on the type of mortgage you are seeking.
A conventional mortgage through Fannie Mae or Freddie Mac typically do not require well and septic inspections. I say “typically” not required because there may be an instance where they are required.
Fannie Mae requires the lender to disclose any information regarding environmental hazards. A lender is required to get the necessary inspections if the appraiser, real estate broker, property seller, property purchaser, or any other party to the mortgage transaction informs the lender that an environmental hazard exists in or on the property, or in the vicinity of the property. Fannie Mae also requires the lender to disclose such information to the borrower and comply with any state or local environmental laws regarding disclosure.
So if you’re buying a home that is on a well and/or septic systems and it comes to the attention of the lender through the appraiser or any other party, inspections will be needed on those systems to get the loan approved. If there is no visible issue and nobody reports a problem, which is typical, then no well and/or septic inspection would be required.
For more details on this issue as it relates to Conventional loans, click here B4-1.4-08, Environmental Hazards Appraisal Requirements.
However, with FHA and VA loans, a well and septic inspection is always required, regardless of the visible condition of these systems. If an inspection doesn’t pass the local guidelines and requirements, remediation will be needed until the systems pass. And an FHA or VA mortgage loan will not be able to close until the inspections pass.
With an FHA loan, the FHA Appraiser must check for issues or malfunction if the property has a septic system. If there are visible deficiencies, the FHA appraiser must require repair or further inspection. And the FHA guidelines also require the lender to get a septic system inspection. Hence, it is important to note regardless of what the FHA appraiser finds, the lender is going to require an inspection of the septic system. The same holds if the home has a well water system.
For further FHA guidelines click on this link, and start reading at the bottom of page 170 from “Requirements for Well Water Testing” for all the details. You will see other interesting details such as:
- The septic tank must be 50 feet from the water supply on existing construction.
- The septic tank must be preferably 100 feet from the water supply on new construction.
- Existing wells must deliver water flow of three to five gallons per minute for existing construction.
- Wells must deliver water flow of five gallons per minute over at least a four-hour period for new construction.
For further VA guidelines click on this link and look for page 12–20 and start reading from “15. Water Supply and Sanitary Facilities”.
You will see information on things such as:
- All testing must be performed by a disinterested third party.
- Water quality for an individual water supply must meet the requirements of the health authority having jurisdiction. If the local authority does not have specific requirements, the guidelines established by the Environmental Protection Agency (EPA) will apply.
- The appraiser must be familiar with the minimum distance requirements between private wells and sources of pollution.
- Water quality test results are valid for 90 days from the date certified by the local health authority unless the local authority indicates otherwise.
Feel free to contact me for any further questions on well and septic systems as it pertains to getting a mortgage, or any other questions in general related to conventional loans, FHA loans, and VA loans.
When you’re ready to buy a new home, one of the first things you have to do is take steps to get your financing in place. Mortgage approval is based in part on an automated underwriting process. It is beneficial to get a pre-approval letter from a mortgage lender before you even make an offer. Having your loan pre-approved can show a seller you are a serious buyer with adequate funds. You can also reduce the risk of the contract falling through.
Lenders typically use one of two underwriting processes for mortgage loans: automated and manual. Understanding the basics of how these types of loan approval work can give you confidence when applying for your mortgage.
I always hear how people miss the good old days. I am not sure I do. I prefer progress. But lately, the mortgage industry has been regressing. And I would say that we have not been making progress. We have actually been going backwards. It seems the mortgage process has swung from too easy, to too strict, and now to downright ludicrous. There is nothing that Fannie Mae wants undocumented that is related to a mortgage borrower’s finances. And I mean that literally. So I understand when someone says to me the following,
TRANSCRIPT (this was taken from a cartoon video I did, featuring monsters):
This is an explanation of how scary Fannie Mae and Freddie Mac (now government owned it is important to note) have become. And how it affects the consumer. Anyone who has gotten a loan in the last 3 years knows how difficult it is. Guess why. Think its the banks? Nope. The underwriters? Nope. It’s the Halloween style nightmare
Can paying off a debt help qualify you for a mortgage? When you qualify for a mortgage loan it may not be for the amount you want. Outstanding debts can affect how much you are able to borrow. In some instances you may be able to pay off the debt in order to qualify for a larger loan.
If you reduce the number of installment payments to 10 or fewer, the loan may not be included in your debt-to-income ratios. What if the debt has a large monthly payment? Then an underwriter may consider it a risk in your debt-to-income ratio.
What is a Cash And Dash? Many people are not aware of a rule that has altered, made more expensive, or stopped people’s refinance attempts. This rule related to Conforming Loans which are loans up to $417,000. It also related to Conforming-Jumbo loans which are loans from $417,001 to $729,750. If you are refinancing and paying off any 2nd trust Home Equity Line of Credit or Home Equity Loan that the transaction must be deemed a ‘cash out refinance’. It cannot be called a ‘no cash out refinance’. This is important for several reasons.
Cash reserves are monies that you need to show a mortgage lender that you have leftover after settlement for emergency and for cash cushion. This convinces the lender you have some reserves after settlement in case of any issues when transitioning into a new mortgage loan. Obviously underwriting guidelines can change based on loan type and
Cash Reserves Requirements for Jumbo loans can be complicated. Jumbo loans, also called Non-Conforming loans, are loans that do not conform to the Conforming loan limits. Conforming loan limits can be found by clicking here. If you have a loan amount that is higher than the Conforming loan limits, then you have a Jumbo loan. Jumbo loans require that a mortgage borrower has cash reserves. The Jumbo loan cash reserves requirement is different from Conforming loans, in that Conforming loans many times do not require cash reserves at all.
What is cash reserves?
Cash reserves is a certain amount that a lender may require that the borrower has left over after they pay their down payment and closing costs at closing, in reserve.
Different lenders have different requirements for cash reserves for their Jumbo loans. There are requirements for the amount of cash reserves, and there are requirements for the types of cash reserves.
Amount of cash reserves (the below is illustrative as it may vary from lender to lender):
6 months of the PITI (principal, interest, taxes, and insurance) are required in general.
Need 4 months PITI if you are retaining your current primary residence
4 months PITI for each rental property you own
And 4 months PITI for a second home/vacation home that you own
Cash reserves are based on all recurring housing expenses for the subject property and in some cases for other property owned by the borrower. Cash reserves are also cumulative, so if you are buying a new home and have a rental property, per the above, you may need 10 months of cash reserves. Housing expenses, also known as principal, interest, taxes, insurance, and assessments (PITIA), include but are not limited to:
- Principal and Interest (as used in the qualifying payment amount)
- Insurances (hazard, flood, and/or mortgage)
- Real Estate Taxes
- Ground rent/leasehold
- Special Assessments
- Homeowners’ association fees
- Monthly co-op fees
- Any home equity loan or HELOC payment, if applicable
Types of cash reserves:
- Cash accounts (checking account, savings account, money market accounts, CD’s)
- Mutual Funds
- Gift money is usually not allowed to count towards cash reserves
- Retirement accounts may or may not be allowed to count towards cash reserves
Retirement accounts as cash reserves
I have seen lenders go back and forth over the years on allowing retirement accounts, such as 401(k), 403(b), IRA, and TSP; to be used as cash reserves.
When a mortgage lender is considering retirement accounts as cash reserves, they are not suggesting that you must liquidate or borrow against the retirement account to generate cash. Lenders are only considering the balance of the retirement account without having to liquidate any of it or borrow against any of it.
Retirement accounts are not very liquid, and hence they shouldn’t be considered cash, which is why at some points in time I’ve seen lenders not allow retirement accounts to count towards cash reserves requirements.
But currently, as of the date of this blog, we have many lenders we work with that allow retirement accounts to be used as cash reserves. This is an important development because it now allows borrowers to only need to have their down payment and closing costs liquid, but not the cash reserves.
Choosing the best contractors for home renovation projects is complicated. Below is a true story that illustrates why it is so crucial to carefully choose contractors to do work on your home. Advice: do NOT shop solely by price. Shopping solely or even mostly on price is what gets consumers into most of the trouble they get into with services or products.
SPRING 2009: A client contacted me for a $40,000 Home Equity Line Of Credit (HELOC) for renovations to his home. I gave him some advice on how to secure the best HELOC at another bank, as I did not have any good source for them at that time. Below was an update from him a few months later:
“The home equity option did not work for us. And our contractor owes us a significant amount of money on a botched home extension project. While we have some legal recourse, it will still take significant, immediate financial resources for us to complete the unfinished construction project. We are left with no choice but to decrease significant monthly expenditures to obtain the funds needed to complete construction. I want to talk about a 30 Year Fixed Rate refinance, which will save us money since we are now on a 15 Year Fixed Rate on our primary mortgage”
Getting a condo loan approved seems to get harder and harder each day. Is condo mortgage financing changing? Below are the loan approval conditions I got on a recent loan submission for a condo purchase:
1. Buyer to get 20% HO6 dwelling coverage.
2. Statement from the property management company about the cleaning services in the condo’s budget. What type of cleaning services are they?
Condominium litigation can be a problem when getting a mortgage. What if a condominium has litigation against it and you want to buy it? To get a loan approved there are certain things a mortgage lender has to document or the loan may be denied.
A mortgage lender has to prove that the litigation has no impact on the safety and structural soundness of the condo.
And the insurance carrier that insures the condominium building is involved. They have to have agreed to provide the defense, and the amount of the litigation must be covered by the HOA’s insurance.
There are other reasons why litigation against a condominium may not be an issue. These may be:
- It is non-monetary litigation including, but not limited to neighbor disputes or rights of quiet enjoyment;
- the HOA is the plaintiff in the litigation and not the defendant;
- the reasonably anticipated or known damages and legal expenses are not expected to exceed 10% of the project’s funded reserves.
Financing a condominium can be tricky for other reasons. Mortgage guidelines have the ability to change at any time. Always talk to a well-reviewed mortgage loan officer. Make sure you understand the current guidelines and how they might apply to you.
A Credit Score Simulator can help with “What If” scenarios to determine what you could potentially do to raise your credit score. It can also show you what could negatively impact your credit score. It is important to see how your credit choices might affect your credit score because your credit score will impact the underwriting of your loan, your interest rate quote, and even the cost of your mortgage insurance.
I came across an article I just had to re-post. We all know about the problems in the mortgage industry with people who are qualified but end up getting hassled and questioned. They get asked for piles of paperwork. Or worse, they get their loan application rejected. Below is an article I found on Reason.com. This is exactly how I’d want to see a loan application from Congress for a mortgage get rejected:
Have you heard a mortgage lender or Realtor talk about a “declining markets policy” lately? A declining markets policy is a policy by a bank or private mortgage insurance (PMI) company, which says that in a real estate market with declining values, you cannot get maximum loan-to-value (LTV) financing on a Conventional loan. Most banks and PMI companies have defined all of DC, different parts of MD and most of Northern Virginia as declining markets.
It used to be that when I was qualifying a mortgage borrower and they told me that their student loans were deferred, I could normally count on not using that debt against them in their debt ratios. However, as we all know underwriting guidelines are stricter these days. Now deferred student loans still have to be counted against mortgage borrowers’ debt ratios, even when no payments are being made and they are in deferred status.
The behavior of others can affect you. The delinquent payment of condo dues of other condo unit owners can affect you. How? I have client who wants a mortgage to buy a unit in a small condo. The condo has 8 units total. I just found out that 2 of the 8 unit owners are currently delinquent on their condo dues.
Fannie Mae only allows a 15% delinquency rate on condo dues, 2 of 8 units being delinquent is 25%! So the loan will be rejected until we can get 1 or 2 of these current units owners to pay their back dues. If only 1 of 8 is delinquent that is a 12.5% delinquency rate, which would fall under the 15% limit, and we could get the loan approved.
What are Desktop Underwriting debt ratio rules? Desktop Underwriter is Fannie Mae’s computer-generated loan underwriting tool. Using completed loan application information, an automated underwriting systems retrieves relevant data, such as a borrower’s credit history, and arrives at a logic-based loan decision. In addition to the time savings, automated underwriting is preferred because it is based on algorithms, eliminating human bias. Freddie Mac maintains and markets a large automated underwriting engine known as Loan Prospector.
The latest version of Fannie Mae’s Desktop Underwriting System is being modified to only accept and approve loans that have a DTI (Debt-To-Income ratio) of 45% or less, with exceptions to 50% for borrowers with strong compensating factors. Assets are definitely a strong compensating factor.
FHA financing may allow for higher debt ratios. However, with HUD’s required capitalization ratio falling dangerously close to the industry minimum, they will likely follow suit.
The bottom line is to make sure homebuyers and Realtors are working with competent lenders who are versed in changes like these prior to shopping for a home.
I heard two things today from two separate underwriters that was infuriating. Neither of them made any common sense. Do mortgage underwriters use common sense?
The first one had to do with an appraisal that was done for a refinance and the appraisal value came in low. I worked up an “appraisal challenge” and sent in 4 new comparable properties as well as my reasoning behind why I thought the original appraisal showed a mistaken value. I clearly had good comps that supported a higher value, and I had two pages of narrative to explain why. The underwriter called me and told me I was wasting my time, and that no appraisal challenge would ever be victorious, and that a lowball appraisal value would never be overturned.
I wrote a blog here in the summer of 2010 that talked about getting an FHA loan on a property that has been flipped. A flipped property is one that an investor buys and fixes up with the purpose of immediate resale. The Federal Housing Administration (FHA) has had a 90 day flip rule in place for quite a while to prevent the purchase and quick resale of a home within 90 days.
Can investors add value over a short period of time
They have doubts about the value added by investors over such a short period of time, and take pains to analyze the value on flipped properties. This past year this rule was lifted and it allowed immediate purchase and resale of a property, but only in the case of a property being foreclosed on and resold by a bank. So if you are buying a short sale or foreclosure, you can buy it and get an FHA loan on it immediately after the seller fixes it up with no waiting period or extra analysis.
Flips are different for Conventional loans than for FHA
But maybe you are not using an FHA loan. Maybe you want to use a Conventional loan backed by Fannie Mae and Freddie Mac. Fannie Mae & Freddie Mac will require a full appraisal if the previous sale was a foreclosure or short sale. And the appraised value and the improvements need to support the appreciation in value. But there will be no time limitation policy against lending on this type of flipped home by the Fannie Mae & Freddie Mac agencies.
However, although Fannie Mae and Freddie Mac have no 90 day flip rule for Conventional loans, many lenders will have their own restrictions on properties that have been bought and sold within 90-180 days. Lenders may allow on a Conventional loan, like on an FHA loan, for the immediate purchase and resale of foreclosed homes and short sales.
What about properties that are not a foreclosure or short sale?
But on properties that are not a foreclosure or short sale, that may be a problem. For example, I was told one lender did indeed have a 90 day limitation on flipped properties on their Conventional loans. And another lender specifically does not allow the resale of property within 6 months of the most recent transfer of ownership. So ask questions of your lender even if you are going with a Conventional loan.
VA loans for veterans
And for you Veterans out there who may want to buy a flipped property, VA has not issued a specific policy on short sales, or a 90 day flip rule. It appears you can buy flipped properties under any circumstances with a VA loan.
For buyers of a flipped home, if the home has recently changed ownership in the last 3 to 6 months it is important to know what the circumstances were. If the property was foreclosed on and being sold by the bank it is likely OK to get any loan. If the property was bought by an investor and resold right away for a higher price, then you will likely have to go through some extra steps and even a waiting period until you can buy the home.
There is a requirement on Conventional loans to have a certain amount of your down payment come from your own hard earned savings. Not only do you need a certain minimum down payment for different types of Conventional loans. You also need to make sure a certain amount comes from your own money, and not a gift. And not borrowed funds, unless they are secured against an asset like real estate or a stock account.
Do not shoot the messenger. It is a fun cliche, is it not? However, it is more than a cliche. It is truth. Why do so many of us act like three year old children when given news we do not like? The mortgage industry is currently full of messengers and full of hard news to deliver. The news is usually fairly innocuous. But people do not take it that way. Below are some examples where the response I hear from people leaves me puzzled.
Most humans I know wait to do things. And wait as long as they can. Even for a mortgage, they wait and take their time in submitting the needed documents. I procrastinated as a child when it came to cleaning up my room. I did it in college when it came to studying for an exam. And I do it as an adult when it comes to going to see the dentist. The only things that I do not procrastinate on are things that are really important, like getting pre-approved for a mortgage. Now that is important! That should be done right away.
Each mortgage lender has dozens of loan programs. And there must be hundreds of lenders. We work with 50 lenders or so. And each lender may have a different interpretation or guideline for each category of the loan. These categories would be related to credit, income, appraisal, assets and debt ratios.
I feel like I am drowning in rules! Save yourself…go on without me! I may make light of the Feds and the banking industry and their arcane rules a bit too much. But now they really deserve it. Now they have gone too far. I have witnessed bureaucratic insanity on such an unreal scale, I am not sure you will believe me.
Lenders are sometimes asked by a mortgage borrower to allow an escrow account to be created for some items to be completed. Repairs cannot be addressed by putting money in escrow. Repairs are usually required to be completed prior to closing. However, lenders may allow an escrow account to be created for items unable to be completed due to weather. Weather related delays are most common in new construction homes.
In my 3.5 decades in the mortgage business, I don’t recall a lender I have worked for ever allowing repair escrows. That is because they are typically messy, and many times end up not being resolved in a timely fashion. There are contractor problems and other situations where the cost exceeds the escrow account reserve. Weather related escrows are a different story, but repair related escrows may be impossible to get approved by a lender.
It has been a while since I wrote about pre-qualification. It seems I need to write about this more often. Lenders hand out pre-qualifications like candy, with little analysis, little required documentation, and then homebuyers go out into the marketplace making representations they cannot meet. And then they lose money. How? Read on.
The Treasury Department last week altered its financial support of Fannie Mae and Freddie Mac. The revised terms are that the guarantees of how much the Feds will back them are going down. But officials say the amounts they are still guaranteeing will be plenty. More importantly, there will now be no dividend that Fannie Mae and Freddie Mac has to pay. The new terms are that whenever there are profits they will simply be swept over to the Feds. And losses will still be covered by we the people.
FHA Condo Loans Get More Complicated? It used to be simple to get an FHA condo loan. Lenders could do an FHA “Spot Condo Approval” which meant that the condo did not need to be on the FHA Approved Condo List. All we lenders needed to do was verify that the condo met certain FHA requirements. An example of the requirements are 51% owner occupancy, no litigation against the condo, no more than 10% of the unit owners behind in their condo fees, etc. Now the condo approval process is more centralized, and more complicated.
Top 8 Myths About FHA Loans
1. FHA appraisals are difficult and often require repairs:
FHA now allows private appraisers to do FHA appraisals, this solved much of the old repair problems where FHA staff appraisers would require numerous repairs to the house before allowing the loan to fund. And, with FHA, lenders are still allowed to use their own appraiser as opposed to a Conventional loan where the bank’s random choice of appraiser is used. Sellers and Realtors should find this attractive, since the new appraisal ordering system for Conventional loans has become a nightmare. Click here for more information on this issue.
There was some confusion as to how long the latest FHA loan limit increase is going to last, which I blogged about here. Was it through the end of 2011, or 2 full years through 2013, or just through next year and it ends 2012? So the verdict is in, and the latest FHA loan limit increase expires at the end of 2012. So come December 2012, there will be another political fight,
It has been established, for as long back as my 25 year mortgage career goes, that if a condo has a high investor level, you were going to have a hard time getting a mortgage. The investor level of a condo is how many units of the total investors own. For example, if a condo has 100 units, and 60 are owned by investors to be rented out and 40 units are owned as primary residences, then the condo has a 60% investor level.
What is functional obsolescence? This post will be interesting to people buying a home, Realtors, appraisers, and most anyone involved in the real estate process.
I recently had a loan get rejected, which I am currently working to get approved. The loan was rejected due to “an unacceptable property”. Upon further questioning, the bank told me this was due to “functional obsolescence”.
When someone says the words: mortgage insurance, most people have a negative reaction because they think paying mortgage insurance is a waste of money. Most people, of course, always think they are qualified well enough and should not have to pay PMI (Private Mortgage Insurance). But most people don’t realize the low down payment loan they need would not even exist without PMI. So maybe its not as evil as first imagined. Another thing that people do not realize is that there is an option to get the lender to pay for the PMI. It is called LPMI, which stands for Lender Paid Mortgage Insurance.
Getting a condo loan gets harder? Getting a mortgage to buy a condominium is getting more complicated. The best advice I can give you is to make sure you talk to an experienced mortgage professional BEFORE YOU WRITE A SALES CONTRACT. This applies not only to the market I cover most in Washington DC, Maryland and Virginia, but nationwide.
Checking with a lender beforehand ensures that the condo is able to be loaned on. You would be surprised how many condos cannot get financing, especially with Conventional mortgage insurance.
How do you go about getting a condo loan in the Washington DC area? Getting a mortgage for a condominium in the Washington DC area has gotten more difficult, as it has for condos in all areas.
An FHA condo loan is easier to get than a Conventional condo loan. There are many rules to remember when you want to buy a condo, but the basic ones to remember to ensure that you get a mortgage are below. For FHA loans:
-the condo building usually must be 5 units or more.
-the building must be at least 51% owner occupied (this is how many units are occupied by primary residents versus investor owned units).
-there can be no right of first refusal in the condo docs.
-the condo should be complete, with no additional phasing.
-no special assessments pending.
-no legal action against condo.
-the HOA must have been in control of the owners association for at least 1 year.
-at least 90% of the units are sold.
-no single entity owns more than 10% of the building.
-adequate insurance and reserve funds in the budget.
Getting a Conventional condo loan is similar to the above, except that you must usually have at least 60% owner occupancy (some banks requires 65% or even 70%).
When a home buyer wants to buy a condo, the bank will not only qualify the home buyer, but they are also qualifying the condominium. So there are more questions to ask when buying a condo, when you want to get a mortgage.
Is there such a thing as getting a loan with no appraisal? There are times when a lender might enter a loan application into the automated underwriting system, and the resulting approval may allow for a “PIW”. A PIW is a Property Inspection Waiver. This means that Fannie Mae or Freddie Mac has decided that due to the characteristics of the loan they feel comfortable proceeding without an appraisal being done.
What is a community property state?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. Community property laws require divorcing couples to split assets acquired during a marriage equally. Marital property includes earnings, all property bought with those earnings, and all debts accrued during the marriage.
Getting mortgages with child support and alimony is difficult. I have people ask me what the requirements are to count alimony or child support income towards qualifying for a mortgage.
First we need a copy of a divorce decree. Or the separation agreement if the divorce is not final. That explains all the terms of any alimony and child support. And any other financial arrangements that may have a positive or negative impact on your mortgage application.
Think about solar panels and mortgages when applying for your loan. The popularity of electric cars and solar panels is increasing. It’s important to point out that having solar panels on your house may impact your ability to get a mortgage. Many times, buying solar panels will be financed. And that is when they have an impact on your ability to purchase or refinance a mortgage.
The mortgage process is not easy. I have had far too many transactions blow up completely or get delayed because the client makes a financial move that they should not during the transaction. Mortgage borrowers should keep all finances static for the two months prior to buying, as well as during the transaction. Consult your loan officer before any financial changes.
It is very common for a buyer and seller to negotiate a seller credit in lieu of repairs after a buyer does a home inspection. Most sellers do not want to bother with doing a small amount of repairs. And some sellers may not have the money until after they go to settlement. So they negotiate a credit and offer to pay some money at settlement for these repairs. The problem comes when the Realtors word this incorrectly in the contract and end up causing last minute problems.
Have student loan debt and getting a mortgage? When calculating a student loan payment on a VA loan there are various rules. These relate to what monthly payment is counted on that student loan debt.
What if documentation shows the student loan debt will be deferred at least 12 months beyond the closing date? Then no monthly payment is counted.
What if a student loan is in repayment or scheduled to begin within 12 months from the date of a VA mortgage loan closing? Then the lender must consider the anticipated monthly payment in calculating the debt-to-income ratio. A payment is established by calculating each loan at a rate of 5% of the outstanding balance divided by 12 months.
I often have people ask me if they can lend their son or daughter money instead of giving it as a down payment gift. Or some want to lend the money and then forgive the loan over time to avoid the gift tax. It seems many want to help their family but avoid taxes while they do it.
First, from an underwriting and mortgage guideline standpoint, this is not an option.
In 2008 Congress decided the mortgage world and the economy in general were imploding. And one of the hundreds of ways they decided that they knew better than anyone else and that they would help (i.e. interfere), was to raise the maximum conforming loan limit that Fannie Mae and Freddie Mac offered for loans.
Are there Home Equity Line limits? It seems any banks that are still doing home equity lines of credit (also known as a HELOC) have limited them to an 80% combined loan-to-value (LTV). This means that the existing 1st trust mortgage and any equity line cannot exceed 80% of the current appraised value. For example:
How are debts paid by others handled on a mortgage application? Sometimes when someone applies for a mortgage with me, they mention they have a debt paid by a parent. They may have a school loan that a parent pays. Or people may tell me they co-signed for someone else’s mortgage, but they do not make the payments.
Today’s real estate market can be competitive for everyone. That’s why it’s important to understand the ins and outs of the home buying process before you hit the market. Let’s talk about what getting a mortgage pre-approval letter. It’s a good idea for anyone heading into the market for a new home.
When you buy a new home, you need a mortgage to purchase it. And before you get a mortgage, you need to determine how much mortgage you qualify for. Different sources may qualify you for different mortgage amounts. And how much you qualify for does not necessarily equate to how much you can afford.
How much you can afford is based on your personal budget. When a mortgage lender tells you how much you can qualify for, that is the highest mortgage amount they’ll approve you for. But this may not be the mortgage size you end up closing on.
Car loans and mortgages, do they affect one another? When a mortgage lender analyzes your finances to qualify you for a mortgage, they’re looking at all of your debt along with the new proposed mortgage payment. The other debts that they consider outside of your new mortgage payment are debts like minimum credit card payments, car loans, student loans, and any losses from other rental property. They do not look at debts like utility bill payments, car insurance or cell phone bills.
I had a self-employed borrower call me recently asking for a quote on an interest rate. She said she had been pre-qualified by someone else and just needed an interest rate quote. I asked her to fill out my pre-qualification form anyway and she agreed. It’s a good thing she did. I discovered an obstacle to her loan approval. She was never going to get her loan approved in her current situation, and she was wasting her time making an offer.
Why was she wasting her time?
Because she was only self-employed for six months! The mortgage guidelines say that you have to be self-employed for two years before you can qualify for a mortgage. Six months of self-employment will not work. Twenty four months minimum is the rule. There may be some scenarios where an exception can be made, but that is considered under certain restrictions.
Lenders don’t know their own self-employed guidelines?
It is astonishing that some lenders do not ask sufficient questions to make sure that a buyer is accurately representing their qualifications in a contractual real estate situation. As a result, mortgage borrowers are going to have do the research to make sure that what they are being told is correct.
If I Want To Keep My Current Property And Rent It, And Buy A New Property, I Have To Do What? If you are looking to buy a new house and want to keep your current home as a rental property, there are rules. On a Conventional loan you need to show the lender on your new home some things that you would not if you were selling your current home instead of renting it. You need to show 6 months “cash reserves”, in addition to the down payment and closing costs on the new house. And you need a 70% loan-to-value (LTV) on your current home, as evidenced by an appraisal.
I had a file come out of the underwriting department recently, and learned something new. Apparently windows need to be operable and open. Sounds silly huh? But operable windows are important due to safety reasons and ingress/egress to get out of the house in an emergency. You want to hear more? OK, read on.
A VA loan is a mortgage loan guaranteed by the Veterans Administration. There are numerous mortgage guidelines for a VA mortgage. I wanted to list some of the more important ones below, but you always need to speak to an experienced mortgage loan officer and have them discuss your specific circumstances as there are many other things to consider in addition to the below.
Justin: We are on. Hey Brian, how are you?
Brian Martucci: Hey, good, Justin.
Justin: Good. Well, happy Thanksgiving to you. I know this is kind of a holiday weekend, but what you have to say is pretty important, especially with everyone hitting Black Friday today.
Brian Martucci: That’s right. Sure is.
It is easy to be confused when shopping for a mortgage these days, especially a refinance. Most lenders just throw up as much stuff on the wall as they can to see what sticks. They would take 1000 loan applications in the hopes of closing on 500 of them. But where does that leave the 500 people that had their loans rejected? Is it fair to have them pay $400-$500 in application fees, and to wait 30-90 days, when it could have been determined in advance the loan was not able to be approved.
It’s not our fault! It is time I pull the curtain aside from the real villain in the mortgage industry, Fannie Mae and Freddie Mac! I know people like to bash individual lenders or even the mortgage underwriter assigned to their file. But they are only following the guidelines of Fannie Mae and Freddie Mac.
There is a new Fannie Mae underwriting rule related to large deposits. There has always been a Fannie Mae rule that made underwriters ask about a large deposit that was clearly not a paycheck deposit. And that is understandable. If someone has a $30,000 deposit on their bank statement, and their paycheck is $4,250 each pay period, then I can see asking where the $30,000 came from. And usually, the answer is that it is a gift, or a transfer from another account. All we have to do is have the client document that with the proper documents. Documenting a large deposit is known in the industry as getting a “source of funds.” But recently, it has gotten more interesting.
President Obama has ordered a complete review of all regulations to remove or overhaul those that inhibit economic expansion without helping consumers. This is part of his “reaching out to the business community”. The President wrote in an opinion piece in the Wall Street Journal recently that he’s mandating “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” He said the initiative is part of an executive order he will sign today codifying a “balanced” approach to regulation. There is a “balanced” approach to regulation?
A limited review condo approval means that when you get a mortgage to purchase a condominium you don’t have to go through the normal extensive document review to approve the condominium. You must have an approved condo to get a mortgage approved to buy a unit in the building. The approval review is more limited/abbreviated with a limited review condo approval.
When things drop there is usually trouble, like bombs, glassware, or variable income. However, sometimes it is good when things drop, like interest rates, gas prices or your golf score. Speaking of dropping income, it is important to know that if you have any sort of variable income and it drops, it will hurt you in qualifying for a mortgage.
There are rules related to the maximum number of financed properties you can have. These are for investment property buyers. There are some mortgage agencies, like Fannie Mae, that will not do a loan for an investment property buyer that already has what they consider to be excessive financed properties.
What if you are buying a new primary residence? Then there is no limit to the number of financed properties that you already have.
I have found out another reason why documenting a mortgage loan application has become a nightmare. This story relates specifically to documenting assets and the bureaucratic, paper-laden gauntlet that it has become. Guess who is responsible? Come on, you only need one guess! The reason that documenting assets has become torture for mortgage applicants is the U.S. federal government. Yes, yet again, we have our nannies and protectors on Capitol Hill to thank for the latest round of insanity.
Forbearance – you should only do it if you absolutely have to. Some people are taking a forbearance on their mortgage as a way to take a break on their mortgage payment when they really do not need to.
Forbearance does not mean you can skip mortgage payments and never pay them back. You have to repay any missed or reduced payments in the future. So, if you’re able to keep up with your payments, keep making them.
Forbearance, only do it if you absolutely have to. Some people are taking a Forbearance on their mortgage as a way to take a break on their mortgage payment when they really do not need to.
But forbearance does not mean you can skip mortgage payments and never pay them back. You have to repay any missed or reduced payments in the future. So, if you’re able to keep up with your payments, keep making them.
Here at Capital Bank Home Loans we have a new dynamic loan application that we use, to help ease the mortgage paperwork. Being dynamic means that it can potentially verify your assets and income during the application process, allowing you to avoid having to upload any documents. And of course we all love to avoid mortgage paperwork!
Mortgage pre-approval, why do it? It seems many home buyers feel they already have a “good enough” idea of what amount of mortgage they qualify for. So they don’t feel the need to consult a mortgage professional in advance of their home search. Or they use some quickie online tool that helps tell them what they are qualified for. But those are really not thorough enough and don’t take into account all the complicated new rules.
And some people have champagne taste and are on a beer budget, and need to be careful in determining how much they can afford to spend on a home.
What is mortgage seasoning? Is it a spice? Believe it or not the word “seasoning” does come into use in the mortgage world. Seasoning means the length of time a homeowner has owned their home and paid on their mortgage. If you bought your house one year ago, you have ‘one year seasoning’.
Seasoning when refinancing
This is important when you buy a house and want to refinance it quickly.
Some people want to refinance quickly because interest rates have dropped far enough below the interest rate they got when they bought the house that refinancing will save them a lot of money. And others want to refinance quickly after settlement to pull some ‘cash out’ of their home for repairs or renovations.
If you do not have at least six months seasoning you can still refinance, but you will not be able to use the increased appraised value in less than six months. In other words, to base your refinance on an increased appraised value, you can’t use the higher value until six months has elapsed (also known as six months seasoning).
An example of this would be:
On January 1, 2009 a new home was purchased for $500,000. Renovations were completed by March 2009 in three months time, and the renovations cost $200,000 and the home will now appraise for $800,000. But since only three months has elapsed, you cannot base your refinance on the new, higher appraised value of $800,000.
You can still refinance, but most lenders will base the value not on a recent appraisal, but on the acquisition cost plus documented receipts for all of the renovations. So in the above example, the refinance would be based on the $500,000 acquisition cost plus $200,000 renovations costs, or $700,000. When six months has elapsed, you would be able to use the appraised value of $800,000.
Seasoning when cash out refinancing
In the above example, if the homeowner wanted to take some cash out to recoup their renovation costs, they would recoup less cash due to using a lower appraisal valuation. Or they could wait until six months from the date of purchase, and then be eligible to use the higher appraised value.
Listing your home for sale
And, in another example of “seasoning”, if you have your home listed for sale, you won’t be able to refinance. Mortgage lenders expect loans to last for a certain period of time, they don’t want to make short term loans, they want to lend to people who appear that they will own the property for a while. Lenders make money from servicing loans. When you put your home on the market, you’re signaling that you really want to sell.
If you take the home off the market, that signals your intentions are to stay, and a lender will refinance your loan. Properties listed for sale in the 6 months preceding the application date for new financing are limited to 70% Loan-To-Value though, So, to recap, if your home is on the market for sale, you cannot refinance. If it is off the market, even for just 1 day, you can refinance.
Loans aren’t immediately profitable for lenders. They have to be held for a period of time to become profitable. That’s why lenders want to be sure you’ll be in your home for a certain period of time.
It is time to report on another crazy underwriting story. The paperwork that people have to provide and the rigid underwriting guidelines that I have to put them through are really absurd at times. The fact that we cannot interject any small amount of logic into the discussion is really getting painful. It is not really the underwriters fault though. They are only interpreters of guidelines imposed on all of us by the rule makers. These would be government agencies like Fannie Mae and Freddie Mac.
Multifamily mortgage financing just got cheaper.
What Is A Multifamily Home?
Multifamily residential homes are two, three, and four unit homes. These are also called duplex, triplex, and four-plex homes. I have also heard them called two-family, three-family, and four-family homes.
Fannie Mae defines multifamily property as, “A property that consists of a structure that provides living space (dwelling units) for two to four families. Although ownership of the structure is evidenced by a single deed.”
Any home with more than 4 units is considered a commercial property. These don’t qualify for a residential loan. I don’t do commercial loans. I do have some knowledge of commercial loans. They typically require large down payments, like 25% down or more. I doubt that will ever change.
Multifamily residential property has historically also required significant down payments. These down payments ranged from a minimum of 15% down to as much as 25% down.
How Did Things Get Cheaper?
There are new 2022 condo mortgage guidelines. There have been several announcements regarding condominium deferred maintenance recently by Fannie Mae and Freddie Mac. We also have to pay attention to guideline changes announced by the various banks that we sell loans to.
Ever since the horrific disaster in Surfside Florida on June 24th 2021 the government agencies and the banks we sell mortgages to have started to incorporate questions related to condominium maintenance into the condo questionnaire. When the building collapsed due to deferred maintenance, it cost people lives and changed condo mortgage guidelines!
New Loan Limits For 2017! The mortgage loan limits have been changed for 2017. For Conventional loans the new limits are:
Conforming loans are:
For Conforming “High Balance” loans in designated high cost areas the new limits are:
Find more details on Conventional loan amounts click here.
Any Conventional loan amount which is higher than the above limits is considered a Jumbo loan (aka non-conforming) and is subject to different underwriting guidelines.
To look up FHA loan limits for your area click here.
To look up VA loan limits for your area click here.
New rules on top of more new rules! Back in May of 2009 there were the HVCC rules created (discussed in a previous post in this blog if you care to search for it), that caused changes in the way appraisals were ordered.
As of July 30th, 2009 there is now the Mortgage Disclosure Improvement Act (MDIA) which is an amendment to the Truth in Lending Act.
These changes now require lenders to provide consumers “early disclosure” of good faith estimates of mortgage loan costs and a minimum seven-day waiting period between disclosure and closing.
The new requirements also say that if the Annual Percentage Rate (APR) goes up or down later in the transaction by more than 1/8%, there must be an additional three business days before closing a loan transaction. This has forced lenders to scramble when a loan starts to contact the title attorney being used for the settlement, to get their exact costs. Waiting for this is time the lender could use to order the appraisal, which is always the slowest part of the process.But, MDIA says the lender cannot order the appraisal until three business days after the initial disclosures are received by the borrower.
There is very little room for error in estimating costs. This will put a lot of strain on a transaction if there is a change in costs that is out of the lender’s control that changes the APR by more than 1/8%, it will possibly cause a delay in settlement.
There’s no outsmarting or escaping the mortgage guidelines upheld by underwriters, no matter how much income or assets the buyer has. The purpose of the underwriting process is to check the loan applicant’s credit, financial capacity, and the collateral. The underwriter’s main purpose is to make sure everything in the application meets the loan’s guidelines that you are applying for. Whether that be from Fannie Mae, Freddie Mac, FHA or VA.
Fannie Mae, Freddie Mac, FHA, and VA all qualify mortgage borrowers by using their gross income. You would think they would use net income, which is after tax income. Especially since a mortgage payment is paid out of after tax income. But they do use gross income. I am sure if they suddenly shifted the guidelines to using net income to qualify mortgage borrowers, the allowable debt ratios would go up to compensate for using the reduced after tax income.
In the mortgage world non-taxable income will usually be grossed up 125%
What this means is that a mortgage borrower with non-taxable income needs to have that non-taxable income “grossed up”. It gets grossed up to approximately whatever level the income would be if it were being earned as gross income. The rule makers arbitrarily use a 125% gross up figure. This means you’d multiply the non-taxable income by 1.25 to determine the gross income to be used in qualifying the borrower.
Borrowers with $4,000 per month in non-taxable income would have $5,000 per month in “grossed up” income for mortgage underwriting purposes. The calculation would look like this: $4,000 x 1.25 = $5,000.
My client story
I had a client recently who was working with a lender who told them they were only pre-qualified for a mortgage of $450,000. However, I pre-qualified them to over a $550,000 mortgage! We finally figured out the former lender was not grossing up the non-taxed portions of their military income.
Non-taxable income may come from:
•Some portions of military income
•Some portion of Social Security, some Federal government employee retirement income, Railroad Retirement Benefits, and some state government retirement income
•Municipal Bond Interest
•Certain types of disability and public assistance payments
•Other income that is documented as being exempt from Federal income taxes
If you or someone you know has non-taxable income, make sure they know the above information.
There is a new underwriting rule change that is going to be very painful for mortgage borrowers. It has to do with open 30 day charge accounts. This relates to paying off credit cards monthly. The rule says for open 30 day charge accounts that do not reflect a monthly payment on the credit report, or 30-day accounts that reflect a monthly payment that is identical to the account balance, lenders must verify borrower funds to pay off the account balance. The documented funds must be in addition to any funds required for closing costs and cash reserves. This is very important. It used to be
When you’re beginning the home-buying process, figuring out what you need to get your mortgage loan can seem complicated. You may even be tempted to find your dream home first before you apply for a mortgage. However, going through the pre-qualification and pre-approval processes at the start of your search can make the entire experience go more smoothly.
Before you meet with a lender or mortgage broker, you should have a good understanding of how the loan process works. This guide covers the basics of loan application, qualification, and approval.
There seems to be Private Mortgage Insurance confusion. Getting a Conventional loan with less than a 20% down payment means paying Private Mortgage Insurance (PMI). And you should be aware that getting PMI has become much more complicated and more difficult.
It is almost impossible to get PMI for a 95% loan is most of the Washington DC Metro area, since most of DC is considered a “declining market”. You would likely have to have 10% down payment in the Washington DC area for a mortgage loan.
Is Private Mortgage Insurance tougher to get on condos? I almost feel like there is no more PMI (Private Mortgage Insurance) on condos! But that is not true, there is PMI availability for condos, but it is getting harder to get. Most people know by now that PMI is needed on a Conventional loan if you have less than 20% down payment.
Not many people realize that their home’s property condition needs to be 100% complete to get financing on it. I see situations more than you would think where a property is not 100% complete and we run into troubles getting the financing approved. I know it sounds silly that settlement on a $300,000 mortgage on a home valued at $400,000 would be held up because the property doesn’t have any railings on one stairwell. But that is the case.
What’s the reason?
I have cited numerous times on this blog that the reason for this is that the Fannie Mae rules on property condition are rigid. They allow for no leeway…at all. I mean not at all. I will give you a few specific examples.
Missing flower boxes
I recently had a purchase loan where the client was borrowing $417,000 on an $865,000 purchase price. That is right, they were putting over 50% down. You would think that there would be some latitude on the condition of the property. But that was not the case. This property was a recent renovation by a developer who did a very nice job. The developer ran out of time. A day or two before settlement there were a couple of flower boxes and areas where shrubbery was going to go in that were not complete. The underwriter would not let the loan go to closing because the landscaping was not 100% complete.
That is a Fannie Mae rule that nobody will work around. Again, this was a 50% down payment loan, with an excellent credit score, and everything else in the loan was in order. No leeway, no latitude, no exceptions. The developer had to scramble and plant the shrubs and flowers and we did manage to go to settlement on time. But it was a last-minute fire drill when it should not have been one. The developer even asked if we could hold back some of his profits at settlement and put some money aside in an escrow account to finish the landscaping after settlement. And Fannie Mae no longer allows escrow accounts for completion of any items. Literally nothing can be escrowed. Fannie Mae wants 100% of the work completed.
An ongoing renovation
I also recently had a call on a potential refinance. The borrower wanted to do a cash out refinance and get some cash out to help him pay off and finish some renovations he was doing. But the potential client told me that he had recently started these renovations. He wondered if that would be a problem. He told me, “The 2nd phase of demo has begun. The staircases currently have no railing. One wall has been removed to open up the floor plan on the 1st floor. The ground level flooded a few years back so that hardwood floor warped. I removed it exposing the concrete slab below. I’d be willing to do a walk-thru with an appraiser or you to get an initial thought regarding whether it would be worth our efforts at this point. Let me know your thoughts.”
Of course I already knew the answer, and so do you. Fannie Mae will make no allowances for anything that is incomplete. Unfortunately I had to tell the client to finish the renovation on his own with his own money. And then we could look at doing the refinance after the property was 100% complete.
So be aware, there will be no exceptions, not for the least little incomplete item no matter how inconsequential. A property should be 100% complete to get a mortgage on it, at least through the traditional channels of Fannie Mae, Freddie Mac, FHA and VA. And of course we all know that those traditional channels are the only game in town at this point.
Do you know anyone that has had regular capital gains income over the last few years from the stock market? It sure has been a roller coaster ride. If you’ve hung on for the whole ride from the debacle in 2008 to the recent new highs, then maybe you have indeed had some capital gains. But have you had gains in back to back years? Have you had them for three years running? Capital gains income can be used to qualify for a mortgage if there has been a consecutive three year history of capital gains, in the three most recent year you are applying for a mortgage.
Mortgage lenders have the potential to improve a mortgage borrower’s credit score. A rapid rescore can improve your credit score. Having an improved credit score can possibly lower your interest rate and/or your Private Mortgage Insurance (PMI) if your loan has PMI. However, improving a credit score is no guarantee of getting lower mortgage terms. Also, improving your credit score may not even be needed. Why? Read on.
I had an interesting exchange with a client that surprised me. We were discussing refinancing a loan in California. I ran the numbers and realized he could save $377 a month. We talked about how to proceed, but then he hesitated. He mentioned something about having to pay some sort of penalty when he refinanced, that he would not have to pay if he did not refinance. I finally realized he was talking about recourse versus non-recourse loans.
Are you self-employed during Covid? Need a mortgage? There are newly revised mortgage guidelines for self-employed people due to the Covid-19 pandemic. There are temporary requirements for assessing income derived from self-employment. The additional due diligence is due to the disruption from the pandemic. Mortgage lenders now need to consider if and how a business has been impacted and the likelihood of income continuance.
There is additional income documentation required. You may need an audited Profit & Loss statement with supporting documentation for the Profit & Loss statement. The continuity and stability of income is what will be considered.
The mortgage rule makers say that self-employed mortgage borrowers can’t use money from their business accounts for a mortgage. Not without some explanation anyway. Why? It’s their money! You would think they would know best what to do with it. Yet, Fannie Mae and Freddie Mac say that they don’t want a self-employed mortgage borrower to use funds from their business bank accounts without some further analysis.
What’s the problem?
Fannie Mae and Freddie Mac worry that taking assets out of a business bank account may materially and negatively impact the operation of the business. So they want further analysis as a result.
Is there a solution?
There is the possibility to allow the withdrawal of funds from business bank accounts. If the self-employed mortgage borrower’s accountant writes a letter stating that the withdrawal of funds from their business bank accounts should not adversely affect the operations of the business.
Some accountants object when approached for a letter like this. They feel it puts them on the hook. Yet, I have had many accountants write such a letter. And some other self-employed mortgage borrowers have chosen simply to use their personal bank accounts instead of their business bank accounts. Writing such a letter does not put an accountant on the hook when they use words like “should not” as opposed to “will not”. I know it still seems silly in some situations to have to get such a letter. But it is indeed a Fannie Mae/Freddie Mac requirement.
2018 UPDATE: There is a more specific rule to follow now, those guidelines are below.
“The lender may use discretion in selecting the method to confirm that the business has adequate liquidity to support the withdrawal of earnings. When business tax returns are provided, for example, the lender may calculate a ratio using a generally accepted formula that measures business liquidity by deriving the proportion of current assets available to meet current liabilities.
It is important that the lender select a business liquidity formula based on how the business operates. For example:
- The Quick Ratio (also known as the Acid Test Ratio) is appropriate for businesses that rely heavily on inventory to generate income. This test excludes inventory from current assets in calculating the proportion of current assets available to meet current liabilities.Quick Ratio = (current assets — inventory) ÷ current liabilities
- The Current Ratio (also known as the Working Capital Ratio) may be more appropriate for businesses not relying on inventory to generate income.Current Ratio = current assets ÷ current liabilities
For either ratio, a result of one or greater is generally sufficient to confirm adequate business liquidity to support the withdrawal of earnings.”
What does this mean?
This means that lenders now have to analyze how much cash is left in the business after the withdrawal of business funds for the new house purchase. And they must determine if the cash left in the business accounts meets one of the above ratios.
A real life example
I had one self-employed mortgage borrower who had $240,000 in her business accounts, and did not keep much money in her personal accounts. She ran a home based consulting business and was well established. During a refinance transaction an underwriter asked for her accountant to write a letter stating that the withdrawal of funds from their business bank accounts to cover the closing costs should not adversely affect the business.
Who could not see that a home based business with low overhead and minimal expenses could easily afford to take $4,000 out of her $240,000 business accounts to cover the closing costs on her refinance?! Keep in mind we had copies of her tax returns to show her business expenses were around $10,000 a year. She could not hurt her business by taking the $4,000 out of a business account with such a large balance. A circus animal could have made that call without getting a letter from an accountant!
You know what happened, don’t you? Yes, I got the letter from the accountant. There was no way around it per the underwriter.
I constantly get questions about whether or not someone who is self-employed needs a minimum of two years of tax returns, or if they can get away with one year of them, when qualifying for a mortgage. I thought I would answer this question and put it to rest. Please realize guidelines can change in the future. As of the date of this blog, the hyperlinks below are guidelines related to the history that self-employed people need, and the number of years of tax returns they need to document their income.
I am sure it has happened to many readers or to someone you know…a mortgage settlement gets delayed or occurs several hours late! And it is customary to blame the mortgage lender, because after all, settlement had been scheduled for weeks and weeks. How could the settlement be delayed when we all knew for so long what the target settlement date was??
The maximum loan size on mortgages varies from area to area. Most people are aware that the Conforming loan limit can be extended in high cost areas. These high cost areas are typically the more urban, high cost markets. But many people are not aware that the Conforming loan amounts as well as the Conforming High Balance loan limits vary from area to area. They are based on a formula using median sales price information for the area.
Sometimes when you buy a new home you find termite damage, termite infestation, or both. When applying for a home loan termite damage is of course unwelcome news. And the lender will want to see the issue resolved before allowing the loan to go to settlement. However, there are solutions to avoid disrupting the mortgage process.
Below grade square footage is an interesting topic. The Basement Is Part Of The House, Or Not? I have recently had a re-occurrence of an appraisal issue that keeps repeating itself. I am not sure if its part of the tightening of underwriting standards, or if it’s logical. But I’d like to explain the recent issue so everyone can be aware of it.
Why is no one concerned about the socialized and nationalized state of mortgage lending? There are almost NO OTHER mortgage options available besides government-backed loans such as FNMA, FHLMC, FHA, and VA. Government now backs well over 9 out of 10 loans and dictates all the rules and guidelines. I feel like we have more patience for government backed mortgages than we would government backed cupcakes!
A Non-Warrantable Condo is not a new style of condo, it is a condominium that does not meet the minimum standards set by Fannie Mae and/or Freddie Mac. In other words, the condo cannot be warranted to meet Fannie/Freddie guidelines. Most lenders will want a condo to be warrantable to Fannie or Freddie so that the loan can be sold to Fannie or Freddie, especially now that most banks and mortgage lenders are only selling to Fannie Mae and Freddie Mac. If a condo is not able to be warranted to Fannie/Freddie guidelines, it is usually due to the fact that the condo has a high investor level. Lenders prefer to see that a condo has 51% or more owner occupants with no more than 49% rentals, and in actuality they really prefer 60% owner occupied, or higher.
Tidewater Notices on VA Loans? If you have never even heard of a Tidewater Notice you are probably wondering, what is a tidewater?! I know the first time I heard the term I was confused. My first thought was, “The property isn’t waterfront. What are they talking about tidewater for?
Tidewater Notices on VA Loans
The Tidewater process by the Department of Veterans Affairs (VA) gives borrowers a way to try to combat a low appraisal valuation before it is even official. VA appraisers can notify the lender that it looks like the home’s value will come in below the purchase price. This is known as invoking the Tidewater Initiative, or Tidewater for short.
Unreimbursed Business Expenses (UBE) is one of the newest issues to trip people up on mortgage applications. Fannie Mae and Freddie Mac have really cracked down on enforcing that lenders deduct any UBE from a mortgage borrower’s income. UBE are expenses that an employee pays that their employer does not pay and also does not reimburse them for. So if you tell me you earn $100,000 a year,
There are times that I have used a mortgage borrower’s retirement account balance/s as income. I have done this even if the borrower is not currently taking required withdrawals from the account/s! But how can an asset be used as income? It can, and the guidelines allow it. However, there are rules.
There are many rules to consider.
- The mortgage must be for a 1-unit or 2-unit Primary Residence or a second home. No investment properties are allowed. And no 3-4 unit properties are allowed.
- The mortgage must be a purchase loan or a no cash-out refinance, not a cash out refinance.
- The maximum loan-to-value is 80%.
- At least one borrower on the account must be 62 years old.
- We take the account balance and divide by 240 to get the monthly income. For example: $800,000 401(k) account balance / 240 = $3,333.33/month in income to help qualify for a mortgage
All the Freddie Mac rules related to this can be seen by clicking here.
What if someone is already taking distributions from retirement accounts?
For retirement accounts that are already being used to take distributions as income, the Fannie Mae rules to document that as acceptable income are found here. Look under the area marked “Retirement, Government Annuity, and Pension Income.” The main points are:
- If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application.
- Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met.
- The borrower must have unrestricted access to the accounts without penalty.
If you are getting near retirement age or you are already retirement age, consider using your retirement accounts as income to help you qualify for a mortgage, even if you are not currently taking withdrawals from the account.
Prior to 2020, veterans could borrow more than the Veteran’s Administration (VA) Loan Limits capped amount, but had to have a down payment of 25% of the difference between the maximum loan limit and the sales price. As of January 1, 2020, the VA has started to allow $0 down loans that exceed the county loan limits.
So now, if a veteran wants to buy a home for $1,000,000 with no money down, they can. $2,000,000? Sure thing. $3,000,000? No problem! However, there are rules and guidelines that come with this new change.
When buying a condo, you may find yourself in a competitive bidding situation. And your realtor may ask you about waiving some or all the contingencies in your contract. These contingencies are usually things like a home inspection contingency, appraisal contingency, and financing contingency. But waiving contract contingencies on a condo can be risky.
Hello. Today I wanted to talk about some guideline changes called TRID. Which stands for, TILA RESPA Integrated Disclosures. The feds have mandated these changes and they’ve really slowed down the loan transaction. So mortgage consumers have to be careful about the deadlines that they write into a sales contract.
Deadlines in a sales contract
When you’re making an offer to a seller, there’s three things that you’re going to target for dates in the contract. One is, the appraisal contingency release date. The second one is the financing contingency release date. And the third one is the closing date. So it used to be before the TRID changes that took place October, 2015 that I would try and get people to write offers using the following dates: 14, 21, and 30. Meaning, 14 days to release the appraisal contingency, then seven more or 21 total to release the financing contingency, and then thirty days to close.
Well now TRID has mandated a couple of things. One, the lender has got to get the final numbers to the consumer three full days prior to settlement. The closing disclosure is the form formerly called the HUD1 Settlement Statement. Now it’s called the Closing Disclosure, the CD. We have to get the CD out three days prior to closing. That’s something that honestly used to happen the day before closing. Or the morning of closing. To have a closing happen in 30 days, which is blazing fast, we’ve really needed almost all of that 30 days. Well now, to ask us to do that three days prior to closing, that tacks time onto the transaction. Also, we’re not allowed to order the appraisal until the consumer has been disclosed to as evidenced by receipt of their signed disclosures.
Parts of the loan process affected
So day one is loan application. We’ll probably get the loan disclosures out to the consumer day two. They may need a day or so to review the disclosures and return them, that’s day three. Then we order the appraisal. So now, we’re taking to day three to order the appraisal. Which is something I used to be able to do on day one. And we need to get the closing disclosure to the consumer three days prior to the settlement date. That’s a bunch of extra time. We really need more time now.
Realtors and lenders often at odds
Now…there’s a conflict between realtors and lenders. The realtors still want do things in 30 days. It’s possible, but the faster that you offer a seller to go to settlement, the more pressure that you’re putting on yourself and the transaction. The mortgage borrowers are tightly integrated with the process. So you’ve got to do the loan application quickly. And you have to sign the disclosures quickly. Then you’ve got to get in all of your supporting documents quickly.
You’ve got to respond quickly to every single request that the lender makes.
I mean, same day, drop everything. Get it done. And a lot of times people just don’t have that time. Which is understandable. We have jobs and lives and family and commitment and travel. So just be really careful. Talk to your lender before you write any of these dates into a contract and commit yourself. There will be quite an uproar if you miss these dates. These are contractual obligations that you must make and a lot of consideration has to be taken into account. What’s your own schedule? What’s the lenders timelines like? And what can everybody together ensure that they can deliver on in the contract? Make sure you talk to all parties involved, and get it right. Thanks.
Mortgage lenders are now required to confirm that you are still employed prior to closing on a mortgage, three business days prior in fact. Mortgage lenders are always required to verify that a borrower has not lost their job, been furloughed, laid off, or had their income altered prior to closing because it impacts their ability to repay the loan. Previously, lenders were able to document a borrower’s employment 10 calendar days prior to settlement.
LoanSafe attempts to find mortgage fraud for lenders. One of the most interesting thing it checks is to see if a mortgage borrower has any interest in any other property. This way an underwriter can check and see if a borrower owns other property they did not disclose, or rents another property. Or maybe a borrower is a partial owner in another property.
What is it?
The service checks numerous databases to see if your name is associated with other property. If so, you have to explain and potentially document it. The underwriters and lenders want to make sure you do not have any other debt obligations that you are not disclosing that might affect your debt ratios negatively.
The service also checks for things related to undisclosed debts, employment issues, your identity, fraud, and more. The company website for this LoanSafe service says the following:
“LoanSafe Fraud Manager uses patented predictive-analytics scoring technology. It exposes suspicious mortgage loans at the application stage, enabling lenders, investors and servicers to quickly identify each loan’s fraud risk.”
My own experience with LoanSafe
I will describe my own personal experience with this LoanSafe service. I got a loan recently for a place I purchased in Washington DC. What they found, how far they dug back, and what I had to document was unreal. When they say LoanSafe attempts to find mortgage fraud, they are not kidding!
1. They found an old address
My name was associated with on South Lee Street in Alexandria. It was a street I had never heard of. I explained I had lived on a North Union Street in Alexandria, but never South Lee Street. It took me a week of thinking and head banging to think of it, and the answer finally hit me. The North Union Street was an address I rented with an ex-girlfriend. She must have moved into her new place on South Lee Street in the same area, and simply transferred our old utility accounts to her new place rather than setting up new accounts in her name alone. It was all fine in the end, we are on good terms, and I got the explanation I needed, but this was going to hold me up if I did not come up with a good answer.
2. Connection to my father
They then questioned me as to why my name was associated with my father’s address in MD. I quickly remembered that I had registered a car there in his name before and never changed it. So I was able to assure them that I did not own my father’s house in MD.
3. Old history
Last, they found several addresses from CA that I used to rent places at, and I had to show leases and show that those were former rentals, and that I was not currently incurring any debt on those.
I found all this to be a bit much, but understand it in light of the losses the industry has taken. But now they have gone all the way in the other direction. So people who are qualified to buy now have to go under heavier scrutiny to pay for the sins of those that have come before us, and defaulted.
Remember these stories and how they may apply to you when you next get a mortgage.
What Is The Difference Between A Direct Lender, Mortgage Broker And A Bank? The way that a mortgage lender is structured is critical in the current mortgage environment. One structure that is getting a lot of attention is direct lenders (aka mortgage bankers). What that means is that the lender is allowed to do the appraisal in-house. They also control the underwriting in-house. And preparation of the closing documents. You could say they operate as if they were the bank. Further,
When is an mortgage loan approval letter really an approval letter? Why is an approval letter not an approval letter, but it’s really a conditional approval letter? Is this a semantics discussion only? Either way, this matters more than you know.
When is an approval really an approval? When is an approval only a conditional approval? Below are the different levels of “loan approval” you can get for a mortgage:
Pre-qualification is done before you make an offer on a home. It is only a loan officer analysis, and supporting financial documents are not required. Only a review of the applicant’s income and debts are done. Standard methods of determining housing and debt ratios are used. This can help indicate the maximum loan amount for which an applicant would qualify. But it is subject to the satisfactory appraisal, further verifications of income, employment and credit history. This is the lowest form of analysis you can have done.
I have cited a thorough and expensive research study several times recently in other blog posts. One message I have not relayed that comes from the data in that study is how poorly the big banks are at execution when it comes to doing mortgages. I will cut and past comments directly from the study that quotes numerous Realtors. I will let their comments speak for themselves. Consumers deal with mortgage transactions once every 3-7 years. But Realtors deal with loans every day. Their opinion is the most valid, unbiased and relevant. I have heard a lot of reasons as to why a homebuyer thinks its best to get a mortgage from a big bank. All of them are wrong headed.
I am from the government and I am here to help you. That punch line seems to be coming more and more true these days. Fannie Mae and Freddie Mac were taken over by the federal government in bankruptcy receivership in 2008. Fannie Mae and Freddie Mac, along with FHA and VA make up almost 100% of mortgage lending in our country. I would not say that the mortgage industry has been socialized, but it certainly is dominated by government. In the last four years the big government stamp on the mortgage process is undeniable and is the sole reason people scream bloody murder at their mortgage lenders during the process.
What if you have a joint bank account with another person and that person is not going to be on a mortgage loan application with you? You will need something called a full access letter from the other person. This would verify to the underwriter that you have access to use that money for settlement, if needed.