Blog Category: mortgage guidelines

septic truck

Are Well And Septic Inspections Needed To Get A Mortgage?

Well and septic inspections may indeed be required to get mortgage approval. But it depends on the type of mortgage you are seeking.

Conventional mortgages

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.

FHA mortgages

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.

VA mortgages

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.

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Cash Reserves Requirements For Jumbo Loans – UPDATE

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
  • Stocks
  • 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.

Conclusion

Mortgage guidelines can change frequently, please schedule a call or email me with questions on your specific situation.

stack of cash

Do You Have Your Own Cash Saved For A Down Payment?

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. Read More

freezing icicles

Getting A Mortgage? Freeze, Don’t Move!

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. Read More

COVID

SELF EMPLOYED LOANS DURING COVID

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. Read More

Self employed Freelance

Self-Employed Mortgage Borrowers Need 1 Or 2 Years Of Tax Returns?

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. Read More

older couple in retirement

Using Retirement Account As Income For A Mortgage

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.

Conclusion

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.

To contact me to discuss any income qualifying or other mortgage questions, click here to schedule a call or you can email me directly.

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What Can Stop You from Buying a House? Common Obstacles and How to Overcome Them

You have a down payment saved up, a good credit score, and a low debt to income ratio. It is time to buy your dream home. However, something prevents you from buying the home. What can stop you from buying a house? In this article we will explore some common obstacles and how you can overcome them.

Read More