Wednesday, January 28, 2009

If the Sales Price is Lower than the Appraised Value, Can I Get the Extra Money After the Closing?

When someone buys a house at a discount off the appraised value, as many bank-owned or HUD homes are sold, the buyer needs to wait a minimum of 6 months before they will be able to refinance and get any equity out of the property. More typically, the waiting period is 12 months.

FHA refinances always have a waiting period of 12 months before any cash can be taken out.

If a buyer wants to refinance to get a lower rate, then they will be able to refinance any time after the closing. The only limitation is that for the first 6 - 12 months (always 12 months for FHA), the sales price and NOT the appraised value must be used to determine the loan-to-value ratio. In other words, if a house sells today for 100K, but has an appraised value of 150K, it will be 6 - 12 months before a lender will allow the borrower to use anything other than the 100K sales price as the value of the house.

Thursday, January 22, 2009

Can I Use My Tax Refund to Qualify for a Mortgage?

Tax time is approaching and many buyers are asking if they can count their tax refund when qualifying for a mortgage. The answer is yes. Tax refunds are a legitimate source of funds for a down payment, closing costs, or reserves (money a lender may require a borrower to have left over after the closing).

The only restriction is that the refund needs to be received and deposited in the borrower's bank account prior to the closing. It does not have to be received before the borrower can apply for the loan.

Monday, January 19, 2009

Here's How to Claim the $7500 Tax Credit for First-Time Homebuyers

We're getting calls every day about the $7500 federal tax credit for first-time home buyers. To get to the IRS form and the instructions, go to our web site and click on the link at the bottom of the home page. While you're on our web site, check out all the other information we have available to educate buyers.

Click here to get to our web site.

Thursday, January 15, 2009

Who Is Paying for the Title Insurance and Closing Fee?

If you have a deal that involves a bank-owned or a HUD home, make sure it is clear who is paying for the owner's title insurance policy and who is paying for the real estate closing fee. In many of the sales contracts we see, the seller (the bank or HUD) states that they will not pay for these fees.

In a typical Colorado transaction, the seller pays for the owner's title policy and for half of the real estate closing fee. If the buyer is going to be responsible for these two additional fees, then it will increase the funds required to close. If the buyer does not have much money in the bank, the need for those additional funds could affect the approval of the loan.

This problem can almost always be overcome, but being aware of it in the negotiation phase is far better than having to address it after a contract has already been signed.

Tuesday, January 13, 2009

4 Loans We're Doing

We're often asked how business is going. Here are four loans we're working on now:

1) The borrower was well qualified except for a debt-to-income ratio that was too high. He was able to get a gift from a relative and pay off the debt (a furniture loan and 3 credit cards) and then he qualified for an FHA loan. FHA guidelines allow a borrower to pay off debt to qualify.

2) The borrower had a debt-to-income ratio that was too high on this deal also. While reviewing the credit report with the borrower, we discovered that two of his debts (a car loan and a student loan) were actually being paid by his son. All we needed as proof was 12 months of cancelled checks showing that the son was paying the debts and Fannie Mae allowed us to remove those debts from his liabilities.

3) We ran this third loan through Fannie Mae's automated underwriting system and it did not get approved. However, we added one month's reserves (one times the principal, interest, taxes, insurance, and mortgage insurance) to his assets, and this time it was approved. We then called the borrower and asked him if he had any assets he didn't think about the first time we spoke to him. It turned out that he had an old 401(k) from a job he left 5 years ago that he forgot about. That was all we needed for the approval.

4) The fourth borrower did not have a high enough credit score to qualify 3 months ago. We ran his credit report through the software we use to determine exactly what must be done to increase scores, and it told us to have him pay down the balance on two credit cards by about a thousand dollars. He paid them down, and we re-ran his credit. This time, the score was high enough for him to qualify. We charge nothing for the use of the software, by the way.

Saturday, January 10, 2009

I Get Paid a Salary From My Family's Business. Why Does a Lender Need to See My Taxes?

We've had a few borrowers ask this question recently: If I get paid a salary from my family's business and get a W-2, why does the lender need to see my tax returns?

The reason the underwriter needs to see tax returns for a salaried employee of a family business is because they are looking to see if the borrower owns any part of the business. It's possible to receive a salary and be treated as an employee of a business and still have an ownership interest in that business. If that's the case, then the borrower is considered to be self-employed in some cases. Also, any losses from the business that are passed on to the borrower need to be deducted from their income.

Sunday, January 4, 2009

How Long Must a Borrower Have a Job Before a Lender Will Use Their Income to Qualify for a Loan?


Many people are changing jobs these days and we are getting a lot of questions about how long someone must be employed before a lender will use their income. Here are the rules:

-- If the borrower is paid as a W-2 employee (not self-employed), then an underwriter will only need to see one pay stub in order to count the income, provided the current job has something to do with the previous job.
-- If the borrower is a W-2 employee, but their current job is in a different field than their previous job, then the automated underwriting systems at Fannie Mae, Freddie Mac, FHA, or VA will tell us how long they have to be at the job.
-- If the borrower just graduated from school and gets a job in their field of study, then they don't need anything more than one pay stub and their diploma.
-- One exception to the W-2 rules is when the borrower earns more than 25% of their income as commission. In that case, the automated underwriting systems will tell us how long they have to be at the job. It could be as short as 6 months or as long as 24 months.
-- If the borrower is self-employed, then the automated underwriting systems will tell us how long they need to have the job, just as if they are paid commission. It could be anywhere from 6 months to 24 months.
-- If the borrower is employed part-time or has a second job, then once again, the automated underwriting systems will tell us how long they need to have the job. Anything less than 24 months for a second job is generally unacceptable.

One thing to keep in mind when dealing with commission or self-employed borrowers is that the income is either averaged over the last 24 months, or annualized (for example, if someone has had a commission job for 6 months, the underwriter would divide that 6 months of income by 12 months to annualize it).

The reason for the different rules is that the lenders are concerned that the income is stable. A new job in the same field as the previous job is stable. A new job for a recent graduate in their field of study is also stable. A commission job is a little less stable. Self-employed income is the least stable of all for full-time employment. Part-time employment or second jobs are extremely unstable.