Wednesday, December 30, 2009

"I Don't Have My W-2 Yet and I Need a Mortgage!"

“I don’t have my W-2 yet. Can I still get a mortgage?” We are asked this question every January by nervous buyers.

No need to worry. The final pay stub of the year is acceptable proof of income and past employment, provided it includes the year-to-date income, which will be the same as the income reported on the W-2.

If the pay stub does not include the year-to-date income, then we can have a verification of employment form completed by the employer.

Friday, December 18, 2009

New FHA Short Sale Rules

FHA loans are used extensively by buyers who have sold their previous house in a short sale (sold it for less than what they owed the lender). FHA has just made some changes to the rules. Some buyers will have more difficulty getting an FHA loan, but many buyers will have an easier time getting an FHA loan. Here are the new rules:

• If the borrower has made all their mortgage payments on time for the previous 12 months before the short sale, and they have not had any late payments on any installment debts (car loans, furniture loans, etc.) in the previous 12 months, they are eligible for an FHA loan. However, if they sold their primary residence in a short sale just to take advantage of declining market conditions, and are trying to purchase a new house that is a similar or superior property within a reasonable commuting distance, they are not eligible for an FHA loan.
• If the borrowers are in default at the time of the short sale, then they are not eligible for an FHA loan for three years from the date of the short sale.

In other words, if the borrowers are not trying to game the system, they can get an FHA loan. If they are trying to game the system, they cannot get an FHA loan.

Tuesday, December 15, 2009

Easy Way to Raise Your Credit Score

One of the easiest ways to raise your credit scores is to maintain the correct ratio of debt to maximum credit. To calculate the ratio, divide the balance on your credit card by the credit limit. For example, if you owe $1500 on a credit card and your credit limit is $2000, you would divide 1500 by 2000 and get a ratio of .75 -- another way of expressing that is to say that you owe 75% of your credit limit.

Here's how to use that information:

• If the ratio is between 70% and 100%, it lowers your score the most.
• If the ratio is between 50% and 70%, it lowers your score a bit less.
• If the ratio is between 30% and 50%, it lowers your score even less.
• If the ratio is between 0% and 30%, it adds the maximum amount of points to your credit score.

If you pay down the balance on your credit cards to below 70%, or below 50%, or below 30%, your scores will go up because you are in a lower ratio category. Many times, someone will be able to raise their credit scores enough to qualify for a mortgage just by paying down the balances on one or more of their cards.

The scores probably won't go up immediately because the creditor (the credit card company) does not immediately report the new balance to the credit agencies. However, it is possible to expedite the process if someone needs their scores raised immediately.

Sunday, December 13, 2009

New Credit and Debt-to-Income Ratio Rules

Fannie Mae is making some very important changes to their underwriting guidelines, effective this weekend (December 12, 2009). Here's what everyone in the real estate and mortgage industries needs to know, and here's how to plan for the changes:

-- The lowest credit score acceptable to Fannie Mae (except for the government refinance bailout loans) is now 620.
-- The maximum debt-to-income ratio for Fannie Mae loans is now 45%, with a possible increase to 50% for borrowers with "strong compensating factors".
-- The debt-to-income ratio (DTI) is calculated like this: add up the monthly principal, interest, taxes, homeowner's insurance, mortgage insurance, HOA dues, and the minimum monthly payments for all debts that show on the credit report. Then divide that number by the borrower's monthly gross income (income before taxes).
-- Strong compensating factors include very high credit scores, very high residual income (income after all payments are made), very large assets, etc. These factors are analyzed by the Fannie Mae software, not by a human underwriter. If the software says they are strong enough to increase the DTI to 50%, then that's OK. An underwriter cannot override the software and increase the allowable DTI.

These new rules will definitely have an impact on the number of people who will be able to qualify for a mortgage, but being aware of the new rules can also help your business tremendously if you know how to capitalize on them. There is no way around these new guidelines, so you need to know what they are and how to deal with the changes.

Here's how you can very easily use the underwriting changes that take effect this weekend to your advantage:

-- Insist that your lender use the Fannie Mae pre-approval software before issuing a pre-approval. If your lender doesn't use it, then you don't have a legitimate pre-approval. Only a very few agents ever ask us if we have run their buyer's loan through the software to get a real pre-approval. We always do, but many lenders do not. Any lender who uses the software will be more than happy to tell you that they use it because it sets them apart from their competition. If you only use lenders who issue legitimate pre-approvals, then you will also set yourself apart from your competition.
-- Find a lender who knows about credit scoring. There is FREE software that lenders can use that will tell someone exactly what they need to do to raise their credit scores. They do NOT need to pay hundreds or thousands of dollars to a "credit repair" company. It can all be done for FREE. Insist that your lender use this free software. We have an ongoing pipeline of borrowers who are taking the advice we give them and eventually buy homes (typically 1-6 months after they contact us for credit advice). These borrowers are incredibly loyal to us and to the real estate agents who referred them to us. Referring people to companies that charge hundreds or thousands of dollars to improve their credit does not make for very loyal clients. Excellent free advice = loyal clients = $$$.

Set yourself apart from your competition by only using lenders who offer excellent free advice.

Tuesday, December 8, 2009

Free Credit Report

We are often asked how to get a free credit report. Here is the information, straight from the Federal Trade Commission web site:

AnnualCreditReport.com is the ONLY authorized source to get your free annual credit report under federal law. The Fair Credit Reporting Act guarantees you access to a free credit report from each of the three nationwide reporting agencies — Experian, Equifax, and TransUnion — every twelve months. The Federal Trade Commission has received complaints from consumers who thought they were ordering their free annual credit report, but instead paid hidden fees or agreed to unwanted services. Don’t be fooled by TV ads, email offers, or online search results. Go to the authorized source when you request your free report.

Tuesday, December 1, 2009

New Good Faith Estimate Causes World to End!

Beginning January 1, 2010, the federal government is requiring all loan originators (both bankers and brokers) to begin using a new Good Faith Estimate (GFE). It is vastly different than the current GFE. Some of the more noticeable changes are:

• All lender fees must now be combined into one number (no more separate origination fee, processing fee, underwriting fee, discount points, etc.)
• Lender fees cannot increase once the interest rate is locked
• The new GFE is 3 pages long
• Every lender must use the same form

You will hear a lot of complaining about the new GFE, but it's not really a very big deal at all. It's just a new form and there is an enormous amount of training available for lenders.

There's no question that it is a real pain in the neck to have to learn how to use the new software to complete the new GFE, but if someone can't figure it out, they probably shouldn't be selling loans anyway. So don't listen to anyone who tells you that the housing industry is going to collapse because we have to fill out a new form. That's just silly.