Blog Category: underwriting
401(k) loan to buy a house? Is it a good idea to borrow against your 401(k) to get the down payment to buy a home? If your employer allows you to borrow from your 401(k) plan, and most do, you can take the lesser of 50% of your vested balance or $50,000. The typical repayment term is five to fifteen years.
Can you use an alternative credit history to help qualify for a mortgage? Banks typically want you to have to have at least four pieces of credit. Sometimes when I pull a credit report for a first time home buyer or a younger person, I see a credit report with one credit card on it, and on occasion nothing at all. Some people only use checks, cash and debit cards to pay for things. Without a credit history comprised of at least four different pieces of credit, it may be difficult to get a loan.
Apparently banks want to see more numerous items of credit history, to feel comfortable extending a large piece of credit (like a mortgage).
However, there is a solution. Banks will allow you to build an alternative credit history. This means that we can show them a 12 month (at least, or you can show a longer history if it exists) credit history of things that normally do not show up on a credit report.
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,
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”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Hi, it is Brian Martucci doing a video blog from the beach. I am in Manhattan Beach, California. Take a look. Beautiful, is it not? So, today I want to do a video blog about occupancy fraud. By occupancy fraud I mean somebody that says that they’re going to live in a property as their primary residence when they really have no intention to live in the property as their primary residence. They really are going to rent it as a rental property.
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.
Rough day? I had an experience recently I’d like to share. It will help people understand why underwriters are so rigid in requiring what Fannie Mae mandates. And why they require it to be submitted prior to closing, with no excuses. This is important because there are times where an underwriter requires some documentation that sometimes cannot be provided immediately by the client. And the client inevitably asks why can’t I send it in after closing.
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??
It may seem odd that someone in the mortgage business wants to discuss how to help consumers find the best mortgage lenders. People search for mortgage providers every day without the benefit of professional help. So, I figured why not help people whether they find their way to me or someone else? Below I’ve listed the most important mortgage questions that you need to ask before you apply for a mortgage loan.
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,
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.
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.
Getting a mortgage when self employed can be tricky. If you own a business and have a loan for it, and you are planning on buying a home, you might be wondering if the business loan will affect getting a mortgage. A business loan can impact your credit score. And if you are the sole proprietor of the business and take out the business loan in your name instead of the business’ name, that may cause issues.