Waiting Periods after a Bankruptcy

Here's how long you have to wait after a bankruptcy before you can get a mortgage.

Two Types of Bankruptcies

• Chapter 7: Debts are wiped out and no longer due. They are discharged.
• Chapter 13: Debts are “reorganized”. The court provides a payment plan to pay the debts.
–Discharged if the person sticks to the payment plan
–Dismissed if they do not stick to the payment plan

Conventional Loans

• Conventional loans are non-government loans
• Chapter 7 Bankruptcy
–4 years from the discharge date
–2 years from the discharge date with extenuating circumstances (death of a spouse, serious illness). Divorce is not an extenuating circumstance.
• Chapter 13 Bankruptcy
–2 years from the discharge date
–4 years from the dismissal date (2 years with extenuating circumstances)

FHA Loans

• Chapter 7 Bankruptcy
–2 years from the discharge date
–1 year with extenuating circumstances
• Chapter 13 Bankruptcy
–1 year of the payment period must have elapsed
–All payments must be made on time
–Need approval of the court

VA Loans

• Chapter 7 Bankruptcy
–2 years from the discharge date
–1 year with extenuating circumstances
• Chapter 13 Bankruptcy
–1 year of the payment period must have elapsed
–All payments must be made on time
–Need approval of the court

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.

What is a Conventional Loan?

Here's what you need to know about conventional loans.

A conventional loan is any non-government loan. Government loans include FHA, VA, and USDA loans.

Conforming Vs. Conventional

• Conforming loans “conform” to the Fannie Mae or Freddie Mac underwriting guidelines
• Fannie Mae and Freddie Mac are private companies that buy mortgages from lenders
• All conforming loans are conventional loans because they are not government loans
• NOT all conventional loans are conforming loans, however, because not all non-government loans conform to the Fannie and Freddie guidelines
• Conforming and conventional are NOT interchangeable terms

Some examples of conventional loans that are NOT conforming loans:

• Portfolio loans: loans that lenders keep in their own portfolio and do not sell to Fannie Mae or Freddie Mac
• Sub-prime loans: loans with very relaxed underwriting guidelines

Is Conventional Better than FHA, VA, or USDA?

• Sometimes yes, and sometimes no
• You need to discuss your situation with a lender to know which is best for you
• Lenders must be approved by the government to sell government loans
• If your lender is not approved to sell a government loan, do you think they will tell you how good it is? Make sure your lender is approved by the government to sell government loans.

Fannie Mae Guidelines

Here's the link:

http://www.allregs.com/tpl/public/fnma_freesiteconv_tll.aspx

• Click on 2011 Selling Guide
• Then on Part B, Originating Through Closing
• Then on Subpart B3, Underwriting Borrowers
• Then on Chapters B3-1, B3-2, B3-3, B3-4, B3-5, and B3-6

Ask your lender if they know how to find the Fannie Mae guidelines. We'll bet they can't!

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.

Seller-Paid Closing Costs

Here's what you need to know about seller-paid closing costs.

What are seller-paid closing costs?

• The seller is allowed to pay a certain percentage of the sales price towards the buyer’s closing costs
• The amount depends on three things:
–The type of loan: conventional, FHA, or VA
–The occupancy type: principal residence, second home, or investment property
–The amount of the down payment

How much can the seller pay?

Conventional (non-government) loans
• Principal residence or second home
–3% if the down payment is less than 10%
–6% if the down payment is 10% or greater, but less than 25%
–9% if the down payment is 25% or greater
• Investment property
–2%, regardless of the size of the down payment

FHA loans (primary residences only)
• 6%, regardless of the size of the down payment

VA loans (primary residences only)
• 4% for seller concessions
–VA funding fee
–Tax and insurance escrows
–Excessive discount points
• Unlimited for all other closing costs

What about the sales contract?

• The amount of seller-paid closing costs that is in the sales contract DOES NOT have any effect on the allowable amount.
• If the contract says the seller will pay 4% towards the buyer’s closing costs, but the limitation is 3%, then the amount in the contract DOES NOT matter. 3% is the max.
• Check with the lender before writing the contract!

Can anyone else pay?

• Yes. The real estate agents can pay the buyer’s closing costs. The same limitations apply.
• The lender can pay the buyer’s closing costs. The amount the lender can pay is unlimited.

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.

Underwriting Overlays

Here's all you need to know about underwriting overlays.

What is an underwriting overlay?

• Fannie Mae, Freddie Mac, FHA, and VA have underwriting guidelines that all lenders must follow if the loan is going to be sold to, insured by, or guaranteed by them
• Lenders are allowed to add their own, more restrictive underwriting guidelines on top of these guidelines
• The additional guidelines are called underwriting overlays

Why do overlays matter?

• The loan must be underwritten according to the most restrictive guidelines
–If the loan is going to Fannie Mae and Fannie Mae has the most restrictive guidelines, the Fannie Mae guidelines are the real guidelines.
–If the individual lender has more restrictive guidelines than Fannie Mae, then the lender’s guidelines are the real guidelines.

Some Examples of Overlays

• Fannie Mae has a minimum credit score of 620, but the lender has a minimum score of 640. 640 is the minimum score allowed!
• Fannie Mae allows a maximum debt-to-income (DTI) ratio of 50%, but the lender has a maximum DTI of 45%. 45% is the maximum DTI allowed!

What about mortgage insurance?

• Mortgage insurance companies have their own underwriting overlays.
• If the mortgage insurance overlays are more restrictive, then they are the real guidelines.
• Mortgage insurance guidelines are almost ALWAYS more restrictive than the lender’s or Fannie Mae’s
• FHA loans do not have mortgage insurance overlays

Why do loans fall apart?

• A conventional loan with mortgage insurance needs to be underwritten to Fannie Mae’s, the individual lender’s, and the mortgage insurance company’s guidelines.
• If the loan officer only looked at the Fannie Mae guidelines, then they only did one-third of their job.
• Loan officers must check ALL the guidelines, or the loan might fall apart and not close.

How do you protect yourself?

• Ask your lender if they check all three sets of guidelines before giving you a pre-approval.
• If they don’t know what you’re talking about – dump the bum. They are no good.
• Underwriters do not make up guidelines. Everything is written down for everyone to read.
• Your lender needs to read the guidelines!!! Loan approvals are easy if you read.

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.

Down Payments

Here's what you need to know about down payments:

How is the down payment determined?

• Type of loan
– Conventional (non-government)
– FHA
– VA
• Type of occupancy
– Primary residence
– Second home
– Investment property

How much is the down payment?

• Conventional loans
–Primary residence = 3%
–Second homes = 10%
–Investment properties = 15%
• FHA loans
–Primary residence ONLY = 3.5%
• VA loans
–Primary residence ONLY = 0% (100% financing)

What about mortgage insurance?

• Conventional loans
–With 20% down, there is no mortgage insurance
• FHA loans
–There is always mortgage insurance for the first 5 years, regardless of the size of the down payment
• VA loans
–There is never any mortgage insurance

Why pay more than the minimum for the down payment?

Conventional loans
• The interest rate is cheaper if the down payment is 5%, rather than the minimum of 3%
• Mortgage insurance is cheaper
–3% down = most expensive
–5% down = less expensive
–10% down = even less expensive
–15% down = even less expensive
–20% down = no mortgage insurance
• Lower loan amount = lower mortgage payment

FHA loans
• Mortgage insurance is cheaper if the down payment is 5%, rather than the minimum of 3.5%
• Lower loan amount = lower mortgage payment

Things to consider when deciding how much to put down

• How much money do I have?
• How big a mortgage payment can I afford?
• Do I want to avoid paying for mortgage insurance?
• Is it more important to me to have equity in my house, or cash in the bank?

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.

Debt-to-Income Ratios (DTI)

What is a debt-to-income ratio?

• The debt-to-income ratio (DTI) is the ratio of liabilities to gross income.
• Used to determine whether someone can afford to pay their mortgage.
• Different loan programs have different DTI ratio requirements.

Front-end and back-end DTI

• FHA loans have 2 DTI ratios
–Front-end ratio (housing ratio)
–Back-end ratio (total debt ratio)
• Conventional loans (non-government loans) and VA loans have only one DTI ratio. In the past, there were 2, but this guideline has changed.

How is the DTI calculated?

• Front-end DTI =
(Principal + interest + taxes + insurance + HOA fees) / total monthly gross income

• Back-end DTI =
(Housing expenses + monthly payments on credit report) / total monthly gross income

What are the DTI ratio guidelines?

• DTI depends on whether the loan is underwritten manually (by a human) or by Fannie Mae’s underwriting software system
• Maximum DTI is always higher when the loan is underwritten using the software
• This is the major reason why you should NEVER use a lender who doesn’t use the underwriting software

Conventional DTI ratio

• Manually underwritten = 36%
–Up to 45% with strong compensating factors
• Underwritten using Fannie Mae software = 45%
–Up to 50% with strong compensating factors
• Compensating factors include:
–Excellent credit
–Very high reserves (money in the bank)
–Large down payment

VA DTI Ratio

• Manually underwritten: 41%
• Underwritten using VA software
– no set maximum ratio
– 45% - 50% is common

FHA DTI ratios

• Manually underwritten: 31% front-end and 43% back-end
• Underwritten using FHA software
– no set maximum ratio
– front-end of 40% and back-end of 50% is common

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.

Mortgage Asset Documentation

Here are the basics (and more) about asset documentation requirements for a mortgage.

Lenders care about a borrower's assets for two reasons:

• Do you have enough money for closing - to cover the down payment and closing costs?
• Do you have enough money for any required reserves?

Lenders only care about liquid assets (cash or assets that can quickly be turned into cash).

If you are using a checking, savings, or money market account to prove you have enough money for a loan, you will need the most recent 2 months of bank statements.

If you are using a retirement account or a stock account, you will need the most recent statement.

Here's what the lenders look for:

• Is the money really yours? Can you explain large deposits into your account?
• Do you manage money responsibly? Do you have insufficient funds charges?
• Do you have any liabilities that are not on your credit report? Car loans, child support payments, etc.?

You do NOT need to document all of your assets - only those assets that will be used to qualify for the mortgage. If you only need $5,000 to cover the down payment, closing costs, and reserves, then that's all you need to prove.

Why do some lenders ask for more documentation? More than likely, they don't know what they're doing. They probably did not use the underwriting software that Fannie Mae provides to lenders that tells them EXACTLY what is needed.

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.

Mortgage Income Documentation

Lenders require much less income documentation than most people think. Here is what is generally needed:

W-2 income:
-- Most recent 30 days of pay stubs
-- Last two years of W-2's

Self-employment income:
-- Most recent two years of federal tax returns. State returns are not needed.

Commission income (if you make 25% or more of your income from commissions):
-- Most recent two years of federal tax returns. State returns are not needed.

Retirement and disability income:
-- Most recent award letter.

You only need to document the income you are actually using to qualify for the loan. If you don't need all your income to qualify, you don't need to document it.

Why do most lenders ask for more documentation than this? Because they don't know what they're doing! A good lender always runs a loan through software that Fannie Mae provides, and it tells us exactly what is required.

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.