Friday, November 28, 2008

Do Car Lease Payments Count as a Liability?

We're often asked if car lease payments count as a liability when qualifying a borrower for a loan.

The answer is yes, even if there are only one or two payments left on the lease. There is a reasonable expectation that the borrower will have to either buy a car or lease another one after the current lease is up, so the payment needs to be counted as a liability.

Wednesday, November 26, 2008

My Spouse Had a Bankruptcy - Can I Get a Loan?

Q: If someone's spouse has had a bankruptcy, does that affect the length of time before they can buy a house?

A: Not necessarily. If both people are going to be on the note (the loan), then it does. If the couple can qualify for a loan with just the income of the person who did not have the bankruptcy, then they can get a loan in just that one person's name.

Tuesday, November 25, 2008

Re-Establishing Credit After a Bankruptcy

Q: What does "re-establishing credit" after a bankruptcy mean?

A: After a bankruptcy, a lender will be looking at a borrower's credit report to make sure they have either kept some accounts open or opened new ones. If the borrower has three open lines of credit (credit cards, car loans, mortgages, etc.), and they do not have any late payments for the 12 months preceding the loan application, then they have "re-established" their credit.

Monday, November 24, 2008

Can Closing Costs Be Rolled into a Loan?

Here's another question we get asked all the time:

Q: Can loan closing costs be rolled into the loan amount?

A: On a refinance transaction, yes, provided there is sufficient equity in the property. On a purchase transaction, the closing costs cannot be rolled into the loan. Two exceptions to this rule include the up-front mortgage insurance premium for FHA loans and the funding fee for VA loans. It may sometimes seem as if the closing costs are being rolled into the loan on a purchase, but in those cases, the fees are actually being paid by a second mortgage from a down payment assistance organization. If there is no down payment assistance program involved, then the buyer or the seller has to come up with the closing costs.

FHA Loan Limits Are Changing Again

FHA loan limits are changing again! Here are the new rules.

Effective January 1, 2009, the limits will be lowered to comply with the Housing and Economic Recovery Act of 2008 (the big bail out act passed back in July). The loan limits had been raised when the Economic Stimulus Act of 2008 was passed in February (that was the previous bail out act), but those were just temporary increases due to expire at the end of 2008. To make it a bit more complicated, the lenders who underwrite the FHA loans are concerned that they will get stuck with loans that are over the limit and FHA won't insure them, so just about everyone lowered the limits this past week, even though FHA rules say they can keep them at the higher amounts until January 1.

It's not as bad as it sounds, though. The new limits are still much higher than the old limits that were in effect before February, even though they are lower than they have been for the past 9 months.

The bottom line is this. In Adams, Arapahoe, Broomfield, Denver, Douglas, and Jefferson Counties, the new limit is $368,000. In Boulder County, the new limit is $402,500. These numbers are the most that FHA will lend on a one-unit purchase. The limits go up significantly for 2, 3, and 4 unit properties.

These new limits are posted on FHA's loan limit web site, but so are the old limits for 2008, so if you use the web site, make sure you choose the correct year. All you need to do is select the correct STATE and the correct LIMIT YEAR from the menus, and then click on SEND. There is no need to select anything else to get the loan limits. Here's the link to the FHA site:

Just a reminder, FHA loans are NOT limited to first time homebuyers and there are NO income limitations. AND the seller can pay a full 6% towards the buyer's closing costs. Don't lose out on a deal because you are getting incorrect information.

Friday, November 21, 2008

How Much Money Can a Buyer Get Back at Closing?

Here's a question we get asked at just about every real estate training seminar we teach:

Q: How much money can a buyer get back at closing?

A: The most a buyer can get back is the amount of their earnest money, less any amount (if any) that they are required to contribute towards the purchase by the loan program guidelines. For example, if the borrower has paid $3,000 in earnest money and the loan program they are using requires a minimum contribution of $1,000, then the most they can receive back at closing is $2,000. If they get any more than that, it would be the same as if the seller was writing them a check for that extra amount. That's considered a seller inducement to purchase (a fancy term for kickback), and that is against the rules.

Thursday, November 20, 2008

International Clients Seminar

Today's tip comes to us courtesy of Jacqui Jeffress at Infinity Real Estate Service. Jacqui's number is 303-887-4210 and her email is

Jacqui would like to invite everyone to attend a seminar being taught at the North Metro Denver Realtor Association (NMDRA) that will shed some light on how to get international clients. Here's some info from the NMDRA promotional flyer:

In this seminar you will learn about the effect of the current economic conditions and exchange rates on International Buyers and Investors coming to Colorado. You will also learn how you can get in front of these potential Buyers and Investors for your local listings and services. Manfred will also tell you how to get deals done in these challenging times.

In addition to all of this, you will also find out:

Who are the buyers? Where are they buying? What are they buying? How can you get in front of them and get some of that? How can you show them your listings and your services? How you can make more money from the clients you already have and make them more loyal to you? What are the best ways to list properties internationally? What are the top 10 world listing sites? What are the most effective ways to market in today’s challenging times?

Dec. 11 at the North Metro Denver Realtor Assoc., 1:00PM - 4:00PM, 3 hours C.E. credit, Instructor Manfred Chemek, $35, Realtor or not, you need this class, call 303-451-5757 to register.

Thank you , Jacqui, for the tip!

What Is an Underwriting Exception?

Q: When a mortgage broker says they are trying to "get an exception" from an underwriter, what does that mean?

A: Underwriters follow underwriting guidelines to determine whether a loan application falls within the risk parameters for a particular loan program. If a loan is not approved because it does not meet all of the guidelines (debt-to-income ratio is too high, reserves - or money in the bank - are too low, the borrower has not been self-employed for long enough, etc.), then the underwriter can still approve the loan if there are "compensating factors". Compensating factors are things that reduce the risk level of the loan. Some examples would be very high credit scores, very low debt-to-income ratios, etc. If the underwriter thinks there are sufficient compensating factors, they may issue an "exception" to the guidelines and approve the loan, even though it does not meet all of the underwriting guidelines.

Wednesday, November 19, 2008

Should Someone Ever Pay a Pre-Payment Penalty?

Here's another question we were asked at a class we taught recently:

Q: Should a buyer ever pay a pre-payment penalty?

A: No, a buyer should never have to pay a pre-payment penalty (PPP). PPP's are added onto loans so the lender and the mortgage broker can make more money. The lender makes more because the borrower is locked into a loan that they are much less likely to refinance. The mortgage broker makes more because the lender pays the broker a rebate for adding the PPP onto the loan. Some mortgage brokers will argue that they will use the rebate they get to pay some of the borrower's closing costs, but that is rarely what actually happens to the money. Typically, the mortgage broker just keeps it for himself.

Tuesday, November 18, 2008

Why Does a Lender Want My Mortgage Statement?

Q: If someone owns a house and is buying another one, why does a lender sometimes want to see the mortgage statement for the buyer's current property? I thought the mortgage payments would be listed on the credit report.

A: The underwriter is looking to see if the homeowner's insurance and property taxes are included in the monthly payment. There is no way to tell from a credit report if the taxes and insurance are included in the amount reported to the credit agencies. If they are not, then they have to be added to the monthly payment to get the correct debt-to-income (DTI) ratio.

Monday, November 17, 2008

Important New Appraisal Changes

Fannie Mae just announced that there are some new appraisal requirements going into effect, in order to make sure that properties are valued correctly. The main change is the addition of the Market Conditions Addendum, which requires the appraiser to go into great detail to support the claim that a market has declining, stable, or increasing property values. This is something that everyone should be familiar with - sales will depend on it. The announcement from Fannie is 9 pages long, so we're supplying the link to the document, rather than pasting the entire thing in this email. Here is the link:

The new addendum must be used for all appraisals dated after April 1, 2009.

There are other changes as well.

- Supervisory appraisers can no longer just sign off on an appraisal - they must inspect the property themselves.
- The sales contract and all addenda must be given to the appraiser. If the contract is updated, the updated contract must be given to the appraiser.
- If the appraiser uses comparable sales from outside the neighborhood where the property is located, they must now explain why they are doing it.

Fannie also clarified some appraisal issues:

- Repair escrows can be used for minor problems with the property (worn carpet, minor plumbing leaks, holes in screens, cracked window glass, etc.).
- The appraiser must comment on each time the property has been listed for sale in the previous 12 months.
- The appraisal must be for the entire property, not just for a part of it (all acreage must be counted).
- If an adjustment for the effective age of the property is used in the appraisal, it must be explained.
- When anyone with a financial interest in the transaction (real estate agents, buyer, seller, mortgage broker, etc.) provides the appraiser with comps, the appraiser must verify them.
- Neighborhood boundaries cannot be expanded to encompass comps.
- Time adjustments must reflect the difference in market conditions between the date of sale of the comp and the date of the appraisal.

Everything other than the use of the new addendum goes into effect on January 1, 2009.

Again, these are big changes and they will have an impact on listing prices and sales prices (probably to lower them - that's the whole point of all of these changes). Make sure you read the Fannie Mae announcement and pass the word on to everyone you work with.

Are the Property Taxes Paid?

Q: How do I know that the property taxes are up to date and paid when I buy a house?

A: The lender requires a tax certificate from the county showing the status of the property taxes. If the taxes are not current, the lender will insist that they be brought up to date at the closing.

Friday, November 14, 2008

Does All Income Need to Be Listed On the Loan Application?

We are often asked if borrowers have to include all of their income on a loan application. Except in the case of a loan where there are maximum income limits (an affordable housing program, for example), the answer is no. It is always best to submit a loan to underwriting with the least amount of income necessary for the approval because everything that is included on the application must be documented.

A good example of how this would work is if a borrower has $50,000 base income and $30,000 commission income. If the borrower can qualify for the loan with just base income and that's all we enter on the application, then all we have to document is base income. That can be done with just a paystub. However, if we included the commission income on the application, we would also need to provide the last two years of tax returns to prove the stability and continuity of the commission income. That slows down both the documentation collection process and the underwriting process. An easy loan has turned into a more difficult loan.

The same is true for assets. If a borrower only needs to have $5,000 in the bank to get an approval, but has $400,000 in ten different accounts, all we would include on the application is one account that has at least $5,000 in it. Again, it simplifies the loan process and results in faster turn times. Plus, the underwriters love us because we make their lives easier, and our loan submissions go to the top of the pile :-)

Thursday, November 13, 2008

FHA Repair Escrows

If someone is buying a HUD home that has a repair escrow amount listed, and is using FHA financing, they can include the amount of the repair escrow in the FHA loan without having to get a rehab loan. Let's say the house is listed at $100,000 and the escrow amount is $2,000. They would be able to pay $100,000 for the house, but get the extra $2,000 included in the loan.

The amount listed for the repairs is not a set number. Before getting the loan, the buyer would need to get an estimate, and that number would be the amount that is included in the escrow account. It could be higher or lower than the amount estimated by HUD. Just about the only limitation on these repair escrow loans is that the buyer cannot add any other repairs into the escrow account. If HUD says the escrow is to "repair the heating system", then it can only be used to repair the heating system.

These repair escrow loans are available with HUD's $100 down program also.

Which Payroll Deductions Count As Liabilities?

Q: Do payroll deductions count as liabilities when calculating the debt-to-income (DTI) ratio?

A: If the deduction is used to pay a debt, such as child support, mandatory loan repayments, etc., then it must be counted as a liability. If the deduction is for payroll taxes, a contribution to a 401(K), union dues, etc., then it does not count as a liability.

Wednesday, November 12, 2008

Borrower is Separated from Their Spouse - Does All Debt Count Against Them?

If a borrower is separated from their spouse, an underwriter will require a separation agreement in order to determine which liabilities each spouse is obligated to pay, and also to determine if any child support or spousal maintenance is involved.

If a formal (legal) separation agreement does not exist, some lenders will approve the loan if both spouse's liabilities, including the housing expenses of both people, are counted in the debt ratio.

Tuesday, November 11, 2008

Bank Statements - Why Do They Need the Blank Pages?

Q: Why does a lender want to see all the pages of bank statements, even if some of them are blank?

A: The main things lenders look for are insufficient funds charges, car loans that are not reported to the credit bureaus (fairly common with credit unions), overdraft loans that are not on the credit report, and unusually large deposits. They also don't have any way of knowing a page is blank until they see it.

Monday, November 10, 2008

Interest Rate Buydowns

Today's tip comes to us courtesy of Tony Kerstiens at Metro Brokers dotcom RealEstate -- 303-880-3579,

An interest rate buydown is something that first time home buyers should consider if they are concerned that there's not much difference between their current rent payment and the amount of a mortgage payment.

A buydown is a temporary reduction in the interest rate of a fixed-rate mortgage. A 2-1 buydown has a reduction of 2% the first year, a reduction of 1% the second year, and then the regular note rate for the rest of the loan term. As an example, a 2-1 buydown for a 30-year fixed rate mortgage with a note rate of 6% would have a payment based on 4% for the first year, 5% for the second year, and 6% for the remaining 28 years.

Buydowns are not free, but if the seller is willing to pay the full 6% in buyer closing costs they are allowed to pay with FHA loans, the money in excess of the usual closing costs can be used to pay for the buydown. Buydowns make it easier for buyers to buy houses, and they make it easier for sellers to sell houses.

Buydowns are not restricted to first time home buyers.

Should You Protest All Accounts on Your Credit Report?

Q: Is it a good idea to do what many "credit repair" companies do, and protest everything listed on a credit report, in the hopes of getting accounts removed?

A: Generally not. If an account is truly an error, then it makes sense to get it removed, provided it is affecting the score. In many cases, however, protesting everything lowers the score because old collection accounts, change-offs, accounts included in bankruptcies, etc. are now listed with a more recent "date of last activity". The more recent the date of last activity is for a derogatory account, the more it lowers the score.

Friday, November 7, 2008

Here's How to Get the Down Payment for an FHA Loan

Now that seller-paid down payment assistance (Nehemiah, AmeriDream, etc.) is gone for FHA loans, it's good to know what the alternatives are if you do not have the mandatory 3% FHA down payment (it goes up to 3.5% on January 1).

If you have household income that falls below the income guidelines established by the Colorado Housing Assistance Corp. (CHAC) and all the other non-seller-paid down payment assistance programs, then that is the easiest way to get the money for the down payment. There is an assistance program for every county in Colorado.

If you have household income above the guideline limits, then the best way to get the down payment is to have a relative either give or lend you the money. It's OK for the relative to borrow it themselves before they give or lend it to you.

If the money is a gift, then the relative needs to sign a gift letter stating that the money does not have to be paid back.

If the money is a loan from a relative, then they have the option of making it a secured loan (making it a second mortgage), or making it an unsecured loan (the only lien against the property will be the FHA loan).

There is a bill in Congress to re-establish seller-paid down payment programs, but it is anyone's guess at the moment whether that will pass and be signed into law.

Thursday, November 6, 2008

Buying a New Primary Residence and Keeping Your Current Residence as a Rental

Just a reminder that the new rules for buying a primary residence, while retaining a current primary residence as a rental, have gone into affect. Here's how it works.

If someone is planning to retain their current primary residence as a rental, they must have 30% equity in their current primary residence if they need to include any rental income to qualify for the loan. They also need a lease agreement and proof that the security deposit for the rental has been deposited into their account.

If they don't have 30% equity in their current primary residence, they can still buy a new primary residence, but they cannot count any rental income from their current house. In other words, they need to be able to qualify for the loan counting both house payments.

There are also reserve requirements that must be met. Reserves are liquid assets (bank accounts, retirement accounts, etc.) that the borrower will have left over after the closing. The required reserves could be as high as 6 times the house payments, but if the loan is run through an automated underwriting system, they are usually lower than 6 months.

For FHA loans, the amount of equity that's needed is 25%, not 30%. The 30% equity requirement is for conventional (non-government) loans.

How Long Can an Appraisal Be Used?

Q: How long can an appraisal be used before a lender will require a new appraisal?

A: The general guideline is 6 months, although an underwriter is allowed to ask for an update before 6 months if they think the property value might have changed. This is a common requirement in an area that has been involved in a natural disaster (flooding, hurricane, etc.). The update to the appraisal is not a full appraisal, but it does include a new exterior photo and the appraiser must use current market data to determine if the property has declined in value since the date of the original appraisal.

Wednesday, November 5, 2008

Calculating Income for a Sole Proprietor

We are often asked how a lender calculates income for a borrower who has their own business and reports that income on IRS Form Schedule C (used for sole proprietorships). It's really very easy to do. Here are the Fannie Mae guidelines:

"The income (or loss) from a borrower’s sole proprietorship business is calculated on the Profit or Loss from Business (Schedule C) and transferred to IRS Form 1040. However, the lender may need to make certain adjustments to the net profit or loss shown on Schedule C to arrive at the borrower’s cash flow. For example, Schedule C may include income that was not obtained from the profits of the borrower’s business. If the lender determines that such income is not recurring, it should adjust the borrower’s cash flow by deducting the nonrecurring income. In addition, the lender may add back to the borrower’s cash flow any deductions the borrower took on Schedule C for depreciation, depletion, business use of a home, amortization, or casualty losses. The lender should deduct from the borrower’s cash flow any exclusion for meals and entertainment expenses that the borrower reported on Schedule C."

There is a form that we complete and send to the underwriter along with the tax returns. For each of the last two years, we start with the borrower's net income, and then add or subtract the items listed above. The bottom line is the amount we can use for income for each year. The income is then averaged over the last two years, and that average is the amount that the underwriter will consider as income. The income must also be stable or increasing from year to year.

The two-year average is an underwriting guideline, but it's important to remember guidelines are meant to guide the underwriters and are not etched in stone. Fannie Mae allows the underwriter to exercise some discretion. If the rest of the loan file is strong enough (good credit, good income, good reserves, etc.), then the loan may be approved with less than 24 months of self-employment. One of the biggest mistakes real estate agents and borrowers make is assuming that a loan will not be approved. It's always best to get a definitive answer from an underwriter.

Tuesday, November 4, 2008

Can Someone Own a House and Not Be Obligated to Pay the Loan?

Q: Can someone be on the title to a property, but not be on the note?

A: Yes, it is not a problem at all. The title deed says who owns the property. The note says who has to pay back the loan. It is possible for someone to be on title (own the property), but not be on the note (be obligated to pay for it).

This can be used to your advantage when qualifying for a loan. If a couple is buying a house and one of them has good credit and the other one has bad credit, it would probably be best for the person with the good credit to qualify for the mortgage and be the only one on the note, but both people could be on title and own the house.

The only disadvantage to doing it this way is that the person with the good credit needs to make enough money to qualify for the loan by themselves. If you want to include someone's income to qualify, then you have to include their liabilities and use their credit score as well. The lowest credit score of all the borrowers is the one that the underwriters use.

Monday, November 3, 2008

USDA Rural Housing Loans - 100% Financing

For properties in places outside of the urban areas of Colorado, the USDA Rural Development (or Guaranteed Rural Housing) loan program allows borrowers to purchase a home with no money down. Here are some of the highlights:

-- 100% financing
-- Not limited to first-time homebuyers
-- No monthly mortgage insurance
-- The seller can pay up to 6% for closing costs and prepaids
-- If the seller won't pay the closing costs, then a gift to cover the closing costs is acceptable from a disinterested third party (a friend of the buyer, for example)
-- Some repairs can be financed into the loan

All counties in Colorado except Denver County are eligible to use this program. However, Adams, Arapahoe, Boulder, Douglas, El Paso, Jefferson, Larimer, Mesa, Pueblo, and Weld have ineligible areas, so any properties in those counties would need to be checked for program compliance.

Here are some areas around Denver where these loans are available: Brighton, Bennett, Firestone, Larkspur, Dacono, Frederick, Lochbuie, Ft. Lupton. There are hundreds of other towns in the state that are eligible as well. Please give us a call with your property address and we can let you know if the property is eligible for the program. There are some income limitations, but they are not so low that most buyers will be excluded ($66,100 for a 2-person family in the Denver-Aurora area, $70,700 for a 2-person family in the Boulder area, etc.).

Rates After the Election?

Q: Will interest rates go up or down after the election?

A: There's no way to tell. Long-term mortgage interest rates are driven by the demand for the mortgage backed securities that Fannie Mae, Freddie Mac, and Ginnie Mae sell, not by the political environment, despite what many people will have you believe. If rates go up after the election, half the pundits will be correct. If they go down, the other half will be correct.