More changes due to Covid

I know… I know…. we’ve had our fill of Covid related news. I hear you! I know your head is probably spinning trying to keep up. Mine too! To compensate, let’s get straight to the point!

A post from earlier in April detailed changes in the mortgage industry. One of the changes focused on the increased scrutiny of continued employment due to many layoffs/furloughs throughout the country. Since the post, we’ve experienced more changes.

• Year to Date Profit and Loss statements are often being required for self employed borrowers. This is to show stable income in the time of Covid.
• Those getting temporary or permanent salary reductions can still qualify for a home loan. So long as we can show the updated income (pay stub reflecting the reduced pay), and the borrower still qualifies for the loan with the reduced pay, then we can proceed as normal.
• Investment accounts had a mandatory manual reduction of 50% from the statement balance due to the losses in the stock market (if an investment account shows $200,000, then we could only use $100,000 toward the loan). With the rebound in stocks, the manual adjustment is now 30%.

While the entire experience right now can be frustrating, underwriting has shown some flexibility:

• P&Ls: I had a client closing where half of their income is earned in the 4th quarter. If you took the first quarter earnings and multiplied by 4 to get a yearly total, the pace would be way off! I had my client compile a P&L from the first quarter in 2019 to compare it to year to date 2020 to show income is similar when compared to the same time last year. The loan was approved.
• Normally when there is a reduction of income/hours, we need to show the reduction has been in place for a period of time (not just one pay period). Well, we have successfully closed clients after one pay period of the reduced pay so long as they still qualify for the loan with the reduced pay.
• Updates are happening in relatively real time as the investment account requirement updated as market conditions improved.

I feel underwriting is trying to work with us during this tough time while still meeting the agency guidelines. I’ll work with my clients to present the best case for continued stability of income for those who are in the loan process and being impacted by the fallout from Covid.

Thinking of getting a home loan right now? Rates are still low for those looking to refinance… people are still out looking for homes to purchase. The housing market is still very active. Contact me today, and we can talk about how Covid will impact your ability to purchase a home (if any impact at all). If you are looking to get the loan on a property in the state of Georgia, I can gladly help you with the loan!

Mortgages and Filing Tax Returns

It’s tax season, and you are trying to buy a home. Not only must you navigate finding a home, applying for the loan, and filing your taxes, you may not realize that the tax filing could impact qualifying for a mortgage.

Well, it can impact qualifying for that home mortgage, and how much it impacts depends on how one is paid.

I’ve talked in the past on this site about how it is just as important how someone is paid instead of just how much someone makes. After April 15th, how someone is paid also impacts the documentation required for the annual income tax filings:

• W2 salary: will need proof of the filing of the tax returns. If an extension is filed, proof of the filed extension. If money is owed on the tax extension, proof the amount owed is paid. The lender will want the transcripts from the IRS, but will typically waive that requirement and get transcripts from the previous two years instead knowing they can request the current year’s transcripts down the road (more on this in a moment). So long as the current year’s tax return copies aren’t showing any income that must be verified through transcripts (such as rental property income, part time business loss/profit), a W2 salaried employee can move forward with only a few hoops to jump through.
• Everyone Else: This large category would include the self-employed, 1099 employees, and W2 employees that earn more than 25% of their income through commission and bonuses. In this category, not only does underwriting still need proof of filing/proof of extension (and proof of payment if taxes owed on an extension), but now tax transcripts must be made available. While an e-file means the IRS accepts the return instantly, the time between filing, accepting, processing the return, and making a tax transcript available can take several weeks. This timing definitely comes into play when scheduling a closing time on your new home purchase.

Now one thing you may be thinking to get around the transcripts is to file an extension. That works until October 15th! That said, the strategy won’t work if income is needed from the current tax year. It also may still require a P&L from the current tax year for some borrowers.

Planning on buying a home this Spring? Want to make sure there isn’t an unexpected delay on closing due to needing a tax transcript? Contact me today. We’ll make sure the timing is all planned out so we won’t be sitting around waiting for a transcript to become available.

Home Buying Preparations – Income

Welcome 2016! This time of year, people are busy making new year’s resolutions. Popular resolutions are losing weight, eating healthier, saving money, quit smoking, travel, spend more time with family… all of these have one thing in common. If you don’t have a plan, you won’t succeed. For example, no one would make the goal of exercising more on January 1st, and then run a marathon on January 2nd!

Buying a home involves a very similar process. You don’t just find a house and make an offer on it. You need a plan. You need to make sure your financial “house” is in order. Otherwise, you could be wasting time and risking your hard earned Earnest Money. Over the next few weeks, this blog will focus on three main aspects of preparing to buy a home through the prequalification process. Those aspects include income, credit, and assets for the down payment.

This week, we’ll focus on income by linking a few posts my colleague, Rodney Shaffer, wrote toward the end of 2015 in terms of qualifying to buy a home and income. These posts are not all inclusive as income from employment, bonuses, commission, self employed, 1099, child support, alimony, retirement, annuities, trust, disability, social security, tips, part time, asset-based income can be used when buying a home. Covering all of those at once would be an EPIC post, so we’ll stick with some common ones.

Overview – So How Much Money Do You Make

Salary or Hourly – Q: How to you earn? A: Hourly vs Salary

Commission* – Q: How do you earn? A: Commission income

*Note self employed and bonus income documentation is similar to commission with one exception. Self Employed borrowers can get by with only one year of tax returns instead of the two years required of commission and bonus income.

For non-traditional forms of income, such as child support, alimony, retirement, annuities, trust, disability, social security, the main qualifying aspect of these is stability. Currently, income “stability” for these types is considered to be any income stream lasting for 3 years after the closing date. Each one I just mentioned may have one small detail different from another, but the BIG unifying theme in all of these is the three-year continuance.

Don’t see your “type” of income listed? Have questions that aren’t answered? You are in luck. Contact me today, and we can discuss. If you are buying in the state of Georgia, I can help you get prequalified and ready to buy your new home.

Loan Prequalification – Income

Today is the third part of a four part series on the prequalification process. We started with credit scores, continued on to down payments, and today will focus on income. Generally speaking, I’ll divide income into three types – W-2 salaried employee, all other employment income, and other. We’ll start with the easy one.

W-2 salaried employees only need to provide pay stubs covering a 30 day period to qualify for a loan. Even if you just changed to a new job, as long as a 2 year continuous work history is established AND you have 30 days of pay stubs from the new job, you can qualify for the loan. Note that the loan process can start without the 30 days of pay stubs of pay stubs from the new job. Until the pay stub is available, an offer letter can be used for the initial underwriting of the loan.

What about “all other employment” income? Maybe the easiest way to separate the two is this… if you are a W-2 salaried employee working for a non-family member, 30 days of pay stubs are needed. If income from your job comes from anything else, chances are tax returns may be required. Examples would include W-2 employees who are employed by family member, rely on commission, or bonuses. The “all other” category would also include 1099 contract employees, full commission income, and self-employed borrowers. When tax returns are required, with today’s underwriting guidelines, you could not use year to date income to buy a home. The income that can be used is the amount filed on previous years tax returns. Since we are 2014, the tax returns for the years 2013 and 2012 could be used. In order to use income from 2014, those returns will need to be filed (meaning the earliest 2014 income can be used is the Spring of 2015).

The “other” category would include non-employment income such as social security, child support, alimony, investment income, retirement income, pensions, etc. Each of these are underwritten with different guidelines. Some of these, such as investment and retirement income, could have their own loan program. When planning to use income from a source other than current employment, definitely let your mortgage professional know.

I would be a great resource for the home buyer who is using income outside of the W-2 salaried category. For years, I would pre-underwrite my loan files prior to submitting them to underwriting. I know the differences between using investment income for buying a home versus the amount of investment assets that can be used for reserves. By knowing specifically what to look for when reviewing tax returns, bank statements, divorce settlements, etc., we should know prior to underwriting if there could be a problem with the loan. If you are buying in Georgia, contact me today to get going!

 

Tax Day is here – now what?

It’s tax day… a day of celebration for everyone (especially CPAs) because it is finally over! Now, before we get too carried away with partying, let’s have a quick refresh on what tax returns mean when applying for a loan.

Borrowers who are self-employed, earn income through commission and bonuses, or are 1099 employees are qualified using their tax returns. The income that can be used when applying for a loan is the amount of money left over after business expenses are deducted. What does that mean? Here are some examples for each category:

1. Self-employed: let’s say a business has gross sales/earnings of $180,000 for 2013. Once the tax returns are filed, there was $120,000 deducted for business expenses. The net profit for that business is $60,000, and that is the amount used for the loan application. While the business may have taken in $180,000 for the year, the business spent $120,000 to earn that $180,000. That is why the net of $60,000 (or $5,000 per month) is used when applying for the loan.

2. Commission: employees who earn all or part of their income through commission may be able to write off some unreimbursed business expenses. The tax returns would show the net income (gross commission income – unreimbursed business expenses). Take the net income number from the past two years and average it out. Assuming the commission income is not declining, the two year average is used for the loan application.

3. Bonus: again, tax returns are used to verify if unreimbursed business expenses were claimed. Once a two year history of receiving bonus income has been established, and the bonus income is verified to be likely to continue, bonus income can look be used on the loan application.

4. 1099 employees: those who are 1099 contract employees are treated as self-employed for the purposes of applying for a loan. The same requirements as described above also apply here.

For those applying for a loan who are W2 salaried employees, none of this applies. For those of us who are not W2 salaried employees, don’t forget there are extra steps involved when applying for a home loan. Don’t assume the income will be fine, but take the time to make sure. We all know what happens when you assume… you can wind up homeless. Contact me today to get started to ensure you are ready to move forward without the unexpected bumps in the road when buying your new home.

 

 

Defining the “credit crunch” Q and A podcast

We’ve all read and heard about “the credit crunch,” but what does that mean exactly for individuals looking to buy a home or perhaps refinance their mortgage? In this podcast, we aim to define the credit crunch. Here is a brief transcript, but go here for the entire podcast.

Q: What is the credit crunch?

A: It isn’t a simple answer because it impacts several parts of the mortgage process. I can say what it isn’t – the credit crunch doesn’t mean perfect credit and a 20% or more down payment is required in order to get approved for a mortgage.

A: The easiest answer I can provide is simply – there isn’t as much money available today to buy a home than there was a few years ago. That doesn’t mean it is impossible to get a mortgage, but it does mean there are tighter guidelines and more documentation being required in order to get approved.

Q: So, one doesn’t need a 20% down payment and perfect credit score to be approved for a mortgage?

A: Definitely not! Remember that media, print, radio, etc., make extreme statements because people tune in and react/watch “extreme”. Truth becomes relative, and higher ratings are the goal. That is why it always seems one person says the world is ending and another says the world has never been better in the same story!

Q: Generally speaking, what are the minimum down payment and credit requirements?

A: With an FHA loan, the down payment can be as little as 3.5% with a credit score down to 620. Also, there are some programs available on foreclosed properties that require less than a 3.5% down payment.

Q: How is the credit crunch affecting documentation requirements?

A: Credit is being viewed differently. For the first time, FHA loans require a minimum credit score for borrowers along with three lines of credit that have been reporting for 12 or more months.

A: Newly self-employed borrowers are facing a tougher time getting approved for loans. In the past, I’ve helped self-employed borrowers get approved with 6 months of income from the new business on the tax return. Now a full year (and possibly up to two years) is the minimum requirement.

A: Fully documented loans are the only ones available. Applicants must provide pay stubs, bank statements, W2s, tax returns, etc. when applying for a mortgage. No doc… stated income.. stated asset.. anything remotely considered risky is off the table.

Q: Any advice to help someone through the credit crunch?

A: I attempt to set expectations for my clients to let them know the process isn’t the same today as it was a few years ago. I ask them to be patient knowing that in the end they are going to get a home at a great price with a great interest rate.

For more information regarding the credit crunch and qualifying for a mortgage, don’t hesitate to contact me!

Income types Q and A podcast

“What does it matter how I’m paid as long as I’m getting paid?”… a common question I’ve heard before from clients. Logically, it makes a lot of sense. However, on paper when viewed by an underwriter, there are important differences. In this podcast, we aim to address those differences. Here is a brief transcript, but go here for the entire podcast.

Q: Please differentiate between W2 and 1099 income.

A: Typically, a W2 employee is a full employee of a company given a salary versus a 1099 employee where the employer doesn’t pay taxes for the employee AND 1099 employees can write off business expenses.

Q: How does an underwriter view different types of pay structures:

A: W2 salary gets the same pay regardless of world events. That means less uncertainty, and it makes an underwriter happy. For new hires, this is ideal. A new employee can qualify with 30-60 days of pay stubs after starting a new job. However, commission and bonus pay that amounts to 25% or more of one’s income will require tax returns just like a self-employed borrower.

Q: Why is that the case?

A: There is no going-forward guarantee of income. In order to get an idea of what to expect, and underwriter looks at the past two years (24 months) to get an idea of how events are likely unfold moving forward.

Q: Is there a difference between an hourly and salary employee:

A: As long as the full time hourly paid employee has guaranteed/consistent hours, it is not treated differently from a W2 salaried employee.

Q: What about overtime:

A: Treated very similar to bonus/commission. An underwriter wants to know how long a person has been earning the overtime pay AND is it likely to continue.

Q: Describe self-employed or 1099 pay qualifications:

A: Up to two years of tax returns are going to be required because, again, there is no guarantee of income and self-employed or 1099 borrowers can write off business expenses that W2 employees typically do not/cannot write off. For instance, one’s income may have been $120,000 in 2009. Come tax season, $60,000 was written off as business expenses. An underwriter interprets that as it cost the borrower $60,000 to make $120,000-meaning the actual income was $60,000.

Q: What about “other income” including social security, disability, child support, alimony, trust income, investment income, etc.:

A: They all hold one thing in common – a 3 year or more continuance will be required. How long one needs to be receiving it before applying for a mortgage depends on each individual item. Listen to the podcast for more info!

For more information on the differences between the types of income and getting qualified for a mortgage, don’t hesitate to contact me!

Type of income and prequalification

“Why does it matter how I’m paid as long as I get paid?”

I’ve received that question numerous times over the past several years being in the mortgage industry. The question does make sense – as long as income from a job is coming in on a regular basis, why does it matter if someone is self- employed, a W2 employee, or a 1099 contract worker?

Unfortunately, for the self-employed or individuals paid on a commission or bonus structure, it does matter. Why? Due to the up-and-down nature of running a business or income based on monthly/annual performance, underwriters want to see a historical record of income that is earned over the course of up to two years.

Unless you are a W2 employee whose salary will be the same every month regardless of the economy or sales, the only way to document your income is through annual federal tax returns. By reviewing tax returns for the past two years, an underwriter can see documented monthly income for 24 months to gauge expected future income.

Here are some examples of different ways one might be paid and what steps are necessary to document the income:

• W2 salaried income – this is the easiest to document. All that is needed is the past 30 days of pay stubs. If recently moved to a new job in the same field still as a W2 employee, a pay stub reflecting 30 days on the job with an acceptance letter to the new position should do it.
• W2 base pay with commission/bonus income – if commission/bonus income is less than 25% of the total salary, then the same rules apply as above should apply. If more than 25% of the total salary, then up to two years of tax returns will be required to document the income.
• Full commission income – up to two years tax returns will be required. Note that any business expense write offs on the tax return will lower the income that can be used to qualify you for the loan.
• Self-employed – two years of tax returns will be required. Again, any claimed business expenses (personal or for the business itself) will reduce the income that can be used to qualify you for the loan.
• Bonus income – two years documented bonus income will be required along with documenting its continuance.
• Same job at the same company but change from W2 salary to commission/bonus income – This is happening more frequently in the business world. Positions that were once salaried are becoming positions with base pay plus commission. If the base salary is sufficient to qualify for the loan, then only pay stubs are required. However, if the commission is also needed to qualify for the loan, then up to two years of tax returns would be required.

Loan programs such as stated income and no documentation loans are no more due to the credit crunch. This means all income must be verified and documented – making how one gets paid all the more important.

If you are looking to buy a home or refinance an existing one and you are not paid as a W2 salaried employee, it is imperative to speaking with a mortgage consultant to ensure everything is order before you are ready to make an offer. If you are in the state of Georgia, I would enjoy the chance to review your situation and help qualify you to buy a home–give me a call!

Happy Tax Day: Just Write it Off (Jerry).

The mortgage business is actually quite straight-forward.

The underwriters who work in the business and the bankers who control the business of lending people hundreds of thousands of dollars are generally methodical, detail oriented, by-the-book, risk-adverse, kind of people.

In an effort to ditch the stuffy-banker image, six or eight or ten years ago, mortgage brokers started marketing the idea of “creative financing” . . . and “creative financing” was supposed to mean that as a broker, I can do loans that the bank can’t do = stated-income loans, no-doc loans, 80-10-10’s, 100% financing, stated-income stated-asset loans, interest-only loans, etc.  However, too many mortgage professionals (the brokers doing the loans and some of the wholesale account reps whose companies were buying the loans) took the word “creative” to mean something a little (a lot) different.  I know, because I lost the business of a handful of borrowers over the years (13 years, ouch) because I was not willing to be “creative” . . . as in, borrower: “well, can’t you just ignore _____ [this or that].”

The over-creativeness of the mortgage business (by the way, don’t look at me) and the crazy-liberal mortgage underwriting guidelines of the past few years (can you believe there used to be a “stated income W2 loan” available?  The lender realizes that the borrower is W2, but will allow them to state their income for qualifying purposes.  I never did one, but referred to them as the “liar loan”) are in large part to blame for the economic debacle that the U.S. is current experiencing (NOT predatory lending — which is what the media and D.C. may want you to believe).

Uh . . . I thought we were going to talk about tax returns??  Sorry.  Keep reading . . .

So, most people understand that the mortgage underwriting pendulum has swung — guidelines are more strict, lenders are more credit score sensitive, downpayment requirements are higher, etc.  BUT, for some reason, most people are surprised (and often quite angry) to find out that there is NO room for creativity when it comes to tax returns.

Your tax returns are your qualifying income.  End of story.

“Well . . . ,” you ask ” . . . what about write-offs?”

With the exception of depreciating assets (which we can add back to qualifying income) and health insurance costs (which can be added back) and a few other things that can be added back to someone’s income for qualifying purposes— a “write-off” is really just a cost of doing business.  If you were selling widgets and made $100 per widget, but it cost you $25 to make the widget (a $25 loss per $100 made), it wouldn’t be fair for the IRS to tax your income at $100 per widget.  Your income would only be taxed at $75 per widget.

So, if you “write-off” the cost of business travel, food and entertainment, or mileage for work, or advertising costs, website design, etc., those costs are costs of doing business.  In other words, if your business made $80,000 in gross receipts (income), but it cost you $20,000 in business expenses (in write-offs) to make the $80,000 . . . then your qualifying income (the income left-over and available to make the mortgage payment and pay the bills) equals $80,000 — $20,000 = $60,000.  The underwriter determines from your tax returns, that in order for you to make $80,000, you have to spend $20,000.

Now, if you made more than $80,000 OR if you actually spent less than $20,000 . . . well . . . it may be that you or your accountant is . . . well . . . more than simply creative.