Thursday, February 24, 2011

Length of Employment - Self-Employed and Commission Income

Self-Employed Underwriting Guidelines

• A borrower who has a 25% or greater interest in a business is considered self-employed
• The borrower must be self-employed for a minimum of 24 months to count income
• However, if the borrower has between 12 – 24 months of self-employed income AND previously earned the same amount or more in a similar position, the income may be counted
–Example: doctor was formerly paid a salary by a hospital and for the past 12 months has owned his own medical practiceEarnings trend must be stable or increasing

How is Self-Employed Income Calculated?

• Earnings trend must be stable or increasing
• Net income (as shown on tax returns) is averaged over the past two years
–Example: if the net income in 2009 was $20,000, and the net income in 2010 was $40,000, then average income used for qualifying for the loan is $30,000
• The following expenses are added back to the borrower’s net income: depreciation, depletion, amortization, casualty losses, and if the borrower is a sole-proprietor (files taxes with IRS Schedule C), business use of a home

Commission Income Guidelines

• Commission income is averaged over the last two years
• 12 – 24 months of commission income may be acceptable, provided the loan application shows there are positive factors indicating the commission income will continue
• If 25% or more of the borrower’s income is from commission, their tax returns must show a full 12 months of commission income
• Income must be stable or increasing from one year to the next
• Non-reimbursed business expenses must be subtracted from gross income

Important Note

Underwriters have a great deal of discretion in determining whether income is acceptable.
Don’t assume income can or cannot be used before talking to a competent lender.


Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

Monday, February 21, 2011

Length of Employment - Hourly and Salary Income

What Matters to a Lender?

• Length of employment
• Stability of income
• Continuity of income

Length of Employment

“Typically, when a borrower has been generating income for two or more years from either part-time or full-time work with any number of employers, the lender may base its underwriting decision on the borrower’s current income.” – Fannie Mae

First Jobs and Jobs in a New Field

• Only need one month of income if the job is a first job or a job in a new field
• HOWEVER, the borrower must have recently completed specific training for the first or new job. Examples:
–Recent college degree and job in same field as degree major
–Recent training certificate for the job
• One paycheck and an offer letter is acceptable in lieu of one full month of income

Stability of Income

• Income stability, rather than employment stability, is what matters
• You do NOT need to have the same job for two years to qualify for a mortgage
• It is acceptable to change jobs often, as long as the income earned is stable (the same or increasing)

Continuity of Income

• Must be a likelihood of continued receipt of income for at least three years
• IMPORTANT: unless there is evidence that it will NOT continue for three years, the lender should conclude that the income WILL continue

Part-Time, Second-Job, and Multiple-Job Income

• Income must be uninterrupted for the previous two years
• Sometimes, 12 months is acceptable, provided there is strong evidence that the income will continue
• Must have a strong likelihood of continuation
• Income must be averaged over the previous two years

Seasonal Income

• Borrower must have worked the same job, or in the same line of seasonal work, for the previous two years
• Employer must verify that there is a reasonable expectation that the borrower will be rehired for the next season

Bonus and Overtime Income

• Bonus and overtime income must have been received for the previous two years
• Employer must confirm that the income is likely to continue
• Income must be averaged over the previous two years
• If the earnings trend is stable or increasing, then it is acceptable
• If the earnings trend is decreasing, then it is not acceptable

Periods of No Employment

• If the period between employment is less than one month, then no explanation is required
• If a few months, then an explanation is required (looking for work is an acceptable explanation)
• If greater than six months, then the borrower must be employed for six months before qualifying for a mortgage, and the work must be related to the previous employment
–Example: taking a few years off to raise children


Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

Thursday, February 17, 2011

Your Monthly Mortgage Payment

How is My Mortgage Payment Calculated?

• There are four basic components of the typical mortgage payment:
–Principal
–Interest
–Taxes
–Insurance
• Sometimes, additional amounts are due monthly:
–Mortgage Insurance
–Condo Owner’s Insurance: HO-6 policy
–Homeowners’ Association fees

Principal and Interest

• Principal = the money you borrowed
• Interest = paid to the lender for the use of the money you borrowed
• With a fully-amortized fixed-rate loan, the amount of principal is very small and the interest is very large at the beginning of the loan term
• Interest due each month = (loan balance X interest rate) / 12

Principal and Interest Example

• Assume a $200,000 loan balance at 5% interest on a 30-year mortgage
• Principal and interest payment = $1073.64

(200,000 X 5%) / 12 = 833.33 interest payment

1073.64 – 833.33 = 240.31 principal payment

Property Taxes and Insurance Escrows

• 1/12th of the annual property taxes and homeowner’s insurance is collected each month by the lender and held in an escrow account until it is due
• When the taxes and insurance payments are due, the lender makes the payments
• Even though the bill comes to the borrower, the lender will pay it
• Conventional (non-government) loans allow a borrower to avoid the escrow account and pay the taxes and insurance themselves, but lenders usually charge .25% of the loan amount at the closing. This is known as an “escrow waiver”.

Mortgage Insurance

• If the loan is for more than 80% of the value of the house, the lender will require mortgage insurance
• 1/12th of the annual mortgage insurance premium is collected by the lender each month as part of the mortgage payment
• VA loans do not have mortgage insurance

Condo Owner’s Insurance

• The Homeowners’ Association will have insurance coverage for the structure, but not for the contents
• If the property is a condo or a townhouse, the lender MAY require the borrower to have condo insurance, covering everything inside the unit
• This is known as an HO-6 insurance policy, and is sometimes referred to as “walls-in” coverage because it insures everything inside the walls of the unit. It is similar to renter’s insurance.
• Some lenders allow the borrower to pay for this insurance themselves, and some lenders require it to be escrowed, like the taxes
• The insurance for the structure is included in the HOA fees

HOA Fees

• If there is a homeowner’s association (HOA), the borrower will need to pay HOA fees
• There is always an HOA with condos and townhouses, and sometimes for planned unit developments (PUDs)
• The HOA fees are NOT part of the mortgage payment, although they do have to be considered when the lender is qualifying the borrower for the loan

Mortgage Payment Review

• Principal (all mortgages, except interest-only loans)
• Interest (all mortgages)
• Taxes (all mortgages, except if the borrower pays the taxes themselves)
Homeowner's Insurance (all mortgages, except condos, a very few townhouses, and when the borrower pays the insurance themselves)
• Mortgage Insurance (if required by the lender)
• Condo Owner’s Insurance (if required by the lender for condos and townhouses)
HOA fees (all condos, all townhouses, some single family residences). Never paid with the mortgage!

Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

Tuesday, February 15, 2011

Mortgage Insurance

What is Mortgage Insurance (MI)?

• Mortgage insurance is an insurance policy that is required on loans that are for amounts greater than 80% of the value of the property (or the sales price, whichever is lower)
• The borrower pays for the insurance policy
• The lender is the beneficiary of the policy if the borrower goes into foreclosure

How are MI Rates Determined?

Conventional loans – MI rates depend on a number of things
–Size of the loan
–Borrower’s credit score
–Down payment amount
–Property location
–Terms of the loan (30 years, 15 years, etc.)

FHA loans – MI rates only depend on the down payment and terms of the loan

What is PMI?

• PMI stands for Private Mortgage Insurance, and is mortgage insurance from a private company
• PMI is only used with conventional loans
• FHA loans have mortgage insurance, but it is paid to the federal government. There is no private mortgage insurance company involved. It is referred to as MI, not PMI.

When Does MI Go Away?

Conventional loans
• Automatically goes away when the borrower has 22% equity in the property, based on the purchase price
• The borrower can get it removed earlier if they can prove that they have 20% equity in the property – requires an appraisal
• Most lenders require MI to be paid for at least 1 year, regardless of the equity

FHA loans
• Automatically goes away when the borrower has 22% equity in the property, based on the purchase price
• MI must be paid for 5 years, regardless of the equity in the property
• Borrower cannot get the MI removed early by proving they have sufficient equity

Lender-Paid MI

• Some lenders offer loans that are advertized as not requiring mortgage insurance
• They really do have MI, but the lender is buying it themselves, usually without telling the borrower
• Interest rates are higher for “no MI” loans
• Overall payment might be lower, but the payment never goes down, regardless of the equity the borrower has in the property

Things to Consider

• FHA loans require an up-front MI payment of 1% of the loan amount – can be added to the loan – not required to be paid in cash
• If a borrower gets two loans and neither one is greater than 80% of the purchase price, there is no MI
–Example: $100,000 purchase price, one loan for $80,000, a second loan for $10,000, and a $10,000 down payment = no MI
• VA loans never require mortgage insurance!


Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

Friday, February 11, 2011

Refinancing a Mortgage

What is a Refinance?

• An existing mortgage is paid off and replaced with a new mortgage
• If a homeowner currently has two or more mortgages, they can all be paid off and combined into one new mortgage
• If the existing mortgage is kept in place, but the terms are changed, that is a loan modification, not a refinance

Rate and Term Refinance

• The new mortgage is paying off an existing mortgage (or mortgages) that was used to purchase the house, OR
• The new mortgage is paying off an existing mortgage that is a refinance of a mortgage that was used to buy the house
• The borrower can get the lesser of $2,000 or 2% of the new loan amount in cash
• Interest rates are lower for rate and term refi’s than for cash-out refi’s

Cash-Out Refinance

• The new mortgage is paying off an existing mortgage (or mortgages) and the borrower is also taking out cash in excess of $2,000 or 2% of the new loan amount, OR
• The new mortgage is paying off a mortgage that was not used to buy the house, OR
• The new mortgage is paying off an existing cash-out refinance
• Interest rates are slightly higher for cash-out refi’s than they are for rate and term refi’s

Subordinating an Existing Mortgage

• If a borrower currently has two mortgages, but only wants to refinance the first mortgage, that is allowed
• However, when the first mortgage is paid off, the second mortgage automatically moves into first lien position, and the new lender will not allow that, SO…
• The lender that owns the second mortgage that is NOT being refinanced must agree to put that mortgage back into second lien position
• They do NOT have to agree to do it

Can Closing Costs be Included in the Refi?

• Yes, they can, for both rate and term and cash-out refinances
• If the closing costs are included in a rate and term refi, it does not become a cash-out refi

Streamline Refinances

• FHA and VA both have rate and term refinance loans that have reduced underwriting requirements
–No income verification (must have a job, though)
–No appraisal
• You must be refinancing an existing FHA or VA loan with a new FHA or VA loan to get a streamline refinance
• The underwriting guidelines change frequently for streamline refi’s, so always check with a competent lender before assuming you can get one

What is the Process for Getting a Refi?

• The application process and the underwriting process for refinances is exactly the same as they are for a mortgage used to purchase a house
• The only difference is that there is no seller or real estate agent involved – only the borrower and the lender

Who Can Sell Me a Refinance Loan?

• Any mortgage broker can sell a refinance loan
• However, if the refinance is an FHA or VA loan, then the lender must be approved by the government to sell FHA and VA loans. Not every lender is approved to sell government loans.

Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

Wednesday, February 2, 2011

Waiting Periods after a Foreclosure or Short Sale

Here is what you need to know about getting a mortgage after a foreclosure or a short sale.

Definitions

• Foreclosure: Homeowner has stopped making mortgage payments, and the property is sold at auction.
• Short Sale: Homeowner sells the property to a buyer for less than the amount owed to the homeowner's current lender. The homeowner’s lender agrees to accept less than the amount owed on the mortgage, and allows the sale.

Conventional Loans - Foreclosure

• 7 years from the completion date of the foreclosure
• 3 years is permitted with extenuating circumstances (death of a spouse, serious illness). Divorce is not an extenuating circumstance.
–Minimum 10% down
–Only primary residences. No second homes or investment properties.

Conventional Loans – Short Sales

• 2 years with 20% down
• 4 years with 10% down
• 7 years with less than 10% down
• With extenuating circumstances, 2 years is permitted with 10% down

FHA Loans - Foreclosures

• 3 years from the completion date of the foreclosure
• Exceptions to the 3-year period are allowed with extenuating circumstances

FHA Loans – Short Sales

• No waiting period if the borrower was current on their mortgage payment at the time of the short sale, AND
–There were no late payments on the mortgage for the 12 months prior to the loan application date
–There were no late payments on any installment debt for the previous 12 months
• 3 years if the borrower was in default at the time of the short sale. Exceptions are allowed if there are extenuating circumstances and credit was good up until the time of the default.

Other FHA Considerations

• No new FHA loans if the borrower pursued the short sale simply to take advantage of declining market conditions, and
• Wants to purchase a similar or superior property at a reduced price within a reasonable commuting distance

VA Loans – Foreclosures & Short Sales

• Foreclosures
–2 years from the completion date
–1 year with extenuating circumstances
• Short Sales
–VA does not have a specific policy regarding short sales
–Most lenders follow the FHA guidelines

Additional Restrictions

• The borrower must have “re-established good credit”, meaning they had no late payments, collection accounts, or any other derogatory credit for the 12 months prior to the loan application
• To re-establish credit, you must use credit
• The guidelines mentioned here are ONLY for Fannie Mae, FHA, and VA. The borrower must ALSO comply with the guidelines of the individual lender and the mortgage insurance company (if the loan is a conventional loan).


Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.