Year End Planning for Self-Employed Buyers

For a self-employed person who wants to buy a home in 2021, now is the time to start planning.  Mortgage underwriting for self-employed borrowers is very different than for W2 salary borrowers, and it’s all about what the borrower reports on tax returns.  Before reviewing the steps a self-employed person should take now, let’s do a quick overview of mortgage underwriting for the self-employed.

First of all, what is a self-employed borrower?  In the mortgage world, a borrower is self-employed if one owns 25% or more of the business.  And even if paying oneself using a W2, if owning 25% or more of the business, the self-employed rules apply.  No exceptions.

Secondly, underwriters calculate self-employed income using the net income reported on the borrower’s tax returns.  We use the net, not the gross, because the net shows the amount of income left after the borrower runs the business.  Only the income remaining after paying business expenses is truly available to pay the mortgage.  In many cases, underwriters will calculate income based on a two-year average of reported net income.  In some cases, underwriters will consider only the most recent year’s reported income.  Discuss this with your loan officer.

So how should the self-employed prepare now for a 2021 home purchase:

1. Review current year P&L statements to understand the income situation.
2. Determine a reasonable budget for a home mortgage payment – based on the buyer’s home purchase criteria.
3. Work with a mortgage professional to determine what 2020 net income is needed to win underwriting approval of the payment.  (Your lender may want to review prior year tax returns.)
4. Plan to report expense deductions that will allow for the needed net income.
5. Plan to have enough available cash to make the income tax payment.

In some cases, the self-employed buyer may want to explore other financing options.  My current client started her business in October 2018.  Her 2019 business return shows a loss, and 2020 is not complete, so she has not filed a return.  But her business has grown rapidly and it is now profitable.  She has also found the perfect house.  We can obtain a mortgage using income calculated from the last 12 months of her business bank statements, which is strong.  So we can help her buy that perfect house now, before she has two full years of positive tax returns.  I can tell you that she is thrilled, as several other lenders have not been able to help her.

Are you self-employed and want to buy a house in 2021?  Or do you know someone who fits this description?  Connect with me now so we can plan for a successful underwriting experience in 2021.  Waiting until after 2020 ends may be too late and your business expenses could hurt your home buying plans.  It’s best to do some planning now.

Student Loan Impacts on Mortgage Approvals

I heard potential a home buyer say something like, “I can’t get a home loan.  I have too much student loan debt.”  Often, the opposite is true.  Many buyers are able to qualify for the home they want even with student loans.  Lending guidelines do not focus on the total amount of student loan (or other type of) debt.  The focus is on the borrower’s monthly payments relative to their income.  We calculate a debt to income ratio.  As long as that ratio falls within our guidelines, the borrower should qualify from an income and debt perspective, even if the outstanding debt balance is very large.

In 2018, I helped a young woman purchase her first home.  She had earned two graduate degrees.  In the process, she accumulated over $350,000 in student loan debt.  Many people would have simply rented, thinking that their student loan debt was too high to win mortgage approval.  But my client’s income was high, and it more than offset the monthly loan payments.  We closed her home purchase and she was thrilled.

Some home buyers have deferred student loans.  They may hope that we do not have to consider deferred student loans in the debt to income ratio, but that is not an option.   If a student loan is in deferment, we can often qualify the buyer using 0.5% of the student loan balance.  If the buyer is on an income-based repayment plan, even if the payment is $0, then we can use the plan-specified payment.  We use these calculated amounts in our debt to income analysis.  Loan originators must be careful to follow the correct guidelines so that borrowers do not encounter unpleasant surprises during underwriting.

One caveat here is an FHA mortgage.  FHA loans require using 1% of the current loan balance or an amortizing monthly payment schedule.  FHA loans do not allow an income-based repayment plan if the monthly payment is not an amortized payment.  In short, it’s often a better option to use a conventional loan instead of FHA when it comes to student debt.

Do you want to buy a Georgia home but fear that your student loans put home ownership out of reach?  Don’t let your fears hold you back.  Give me a call and let’s explore your options.  You might be able to buy a home sooner than you think.  I’ll help you find the best loan program to get you into a home as soon as possible.  If that’s not right now, I’ll coach you to prepare for a home purchase as soon as possible.

Mortgage Forbearance in the Covid-19 World

Many aspects of our daily lives continue to be impacted by Covid-19. From social distancing, no going out to eat, job furloughs, job layoffs, to the Paycheck Protection Program, I could go on and on.  Here at The Mortgage Blog, let’s continue to focus on Covid’s impact in the mortgage world. One important topic right is now mortgage loan forbearance.  In this post, we will explain what forbearance means and its potential implications for homeowners.

A recent Wall Street Journal article defined forbearance as follows, “The stimulus package that Congress passed in March allows homeowners with federally-backed loans to suspend monthly payments for up to a year without penalty, if they face financial hardship.”  Forbearance is when the mortgage servicer allows the borrower to pause or reduce monthly payments for a specific time period.  Forbearance does not erase the payments owed.  The borrower must repay the missed or reduced payments at a future date.  Ultimately, forbearance is not a grant with no strings attached like other stimulus components.

As the article also notes, the law does not specify how loan servicers must handle loans when forbearance ends.  Some borrowers are hearing that their loan servicers may require a balloon payment when forbearance ends.  Other loan servicers have proposed adding the delayed payments (and accrued interest) to the loan balance, thus requiring full repayment when the loan is eventually paid in full.  At this point, the federal government has not issued guidelines, so homeowners are hearing different solutions from different servicers.

Here are some important thoughts about forbearance.  First of all, if a homeowner cannot make a mortgage payment due to a job loss or income reduction, forbearance is a better option than a late payment or default.  It would be wise for homeowners who cannot pay to contact their loan servicer about forbearance.  But know that forbearance may impact the borrower’s credit.  Forbearance is better than late or missed mortgage payments, but the forbearance status is noted on a credit report.  Lenders may consider forbearance status when applying for a home loan. For example, a potential borrower must be current on their mortgage payments to apply for a conventional loan. While the CARES Act states a credit score should not be negatively impacted by forbearance, being in forbearance could still be considered in evaluating the overall credit risk of the borrower.

In other words, forbearance is not a wise move for someone who still earns enough to pay the mortgage.  Borrowers with the ability to pay should not see this as an opportunity to skip payments. For those considering using forbearance to skip mortgage payments and save money for a down payment, this is not a wise strategy. Those doing something along these lines may be sad to learn they may not be approved for a mortgage on the new home.

Ultimately, if a borrower still has their job, the wisest move is to keep making mortgage payments.  If someone finds themselves laid off or furloughed and cannot pay, forbearance is better than late or missed mortgage payments.

Do you know someone who wants to buy a home in Georgia?  If so, please refer them to me.  Dunwoody Mortgage will help home buyers navigate the new more stringent loan guidelines to successfully close on a house soon.

How Relatives Can Assist Home Buyers…

A recent survey of 1,045 adults found that 77% of the Gen Z and Millennial cohorts expect their parents’ financial assistance when purchasing their first home.  Of the young people surveyed, 38% expected help funding a down payment, 31% expected parents to co-sign on their mortgage, and 24% percent expected help covering closing costs.  From the lender’s perspective, this is all very doable as long as the needed documentation is delivered and all other lending criteria (e.g., credit scores and debt to income ratios) are carefully met.  Documenting financial assistance from relatives can be challenging if the borrower does not plan in advance, so here are some suggested “best practices” for home buyers who expect this help.

The “gifts of cash” concept covers help covering both down payments and closing costs, as mentioned in the survey.  Parents and other relatives can give cash to cover all aspects of the buyer’s cash to close – down payment, closing costs, and prepaid escrow.  To be approved, such gifts need to come from documented relatives, which includes parents, grandparents, siblings, and even aunts and uncles, along with spouses, domestic partners, and fiancés.  From experience, I can report that underwriters will likely not approve gifts from nieces or nephews and not from ex-spouses, as the relationship has been legally terminated.

Underwriters expect gifts to be carefully documented.  This includes a gift letter signed by both giver and buyer.  The letter states that the money given is a gift, and not a loan.  Loans to help buyers are prohibited.  If the giver makes the gift using a check, the underwriter will want to see a copy of the check.  And if the gift occurs before closing, the underwriter will want to see bank statements from the giver and the buyer showing the funds coming out of the giver’s account and into the buyer’s account.  For some loan types, the giver may have to show proof of funds and document the source of any “large deposits” into the giving account.  My preference for conventional loans is to have the giver wire the funds directly to the closing attorney’s escrow account.  When this is done for a conventional loan, the only documentation typically required for the buyer and giver is the gift letter itself.  It’s much simpler and less time consuming, so I recommend this approach when possible.

Relatives and even friends can co-sign mortgages along with the home buyer.  (Yes, friends can co-sign…I recently verified this for a potential client.)  To do this, we combine loan files for the buyer and the co-signer.  As long as the combined file meets all underwriting criteria (credit scores, available cash to close, and combined debt to income ratio), underwriting will approve mortgages including the “non-occupant co-borrower.”

Do you know a young person who wants to end her expense-only monthly rental cost?  Ask her if she is expecting an income tax refund this year.  Then connect her with me.  I’ll help her explore how best to fund a home purchase with that refund and assistance from family, if necessary.

The Mortgage World and COVID-19…

The Mortgage Blog has documented the recent rapid swings in mortgage interest rates based on COVID-19 economic impacts.  Now let’s look at some positive (non-interest rate) news from the mortgage world, specifically regulatory changes resulting from the massive disruption to the world economy.

First of all, Fannie Mae and Freddie Mac will ease their appraisal and employment verification standards, based on a Federal Housing Finance Agency directive.  The goal is to “facilitate liquidity in the mortgage market during the coronavirus national emergency.”  Appraisal management companies can now use “appraisal alternatives” that reduce the need for appraisers to enter homes “for eligible mortgages.”  Appraisers can use desktop appraisals and drive-by appraisals in certain circumstances.  Fannie Mae stated these alternatives may be used “when an interior inspection is not feasible because of COVID-19 concerns.”

The second source of good news is from financial regulators working to help borrowers avoid foreclosures.  On March 17, Fannie Mae, Freddie Mac, and HUD (FHA’s loan guarantor) announced that they will suspend foreclosures and evictions for 60 days to help borrowers stay in their homes while COVID-19 spreads.  The State of New York went further, as Gov. Andrew Cuomo announced that the state will enact a 90-day mortgage relief period.  Options for relief include forebearance, which allows borrowers to suspend mortgage payments for up to 12 months due to COVID-19 caused hardship.  Other options may include mortgage modifications and “other mortgage payment relief options available based on the borrower’s individual circumstances.”

I find this mortgage-market news encouraging, and hopefully it will reassure people considering a home purchase.  Just a reminder if you are thinking about a home purchase – interest rates are at very low levels historically.  From a mortgage perspective, now is still a good time to buy a home.  If you want to buy a home in the State of Georgia, reach out to me.  I promise that Dunwoody Mortgage will deliver outstanding service and will go the extra mile to close your purchase as quickly and with as little hassle as possible.

Waiting Periods After Derogatory Credit Items – Bankruptcies

In the last post, we looked at how lending guidelines require specific waiting periods for different types of “derogatory items” on a borrower’s credit report.  Then we zeroed in on waiting periods following a property foreclosure.  In this post, we will cover the waiting periods required after bankruptcy filings.  As with foreclosures, the different mortgage types specify different waiting periods.  The waiting periods also vary by the type of bankruptcy filed – Chapter 7 or Chapter 13.

Let’s start with Chapter 7 – the required waiting periods are as follows:

• FHA – 2 years from the discharge date
• VA – 2 years from the discharge date
• Conventional – 4 years from the discharge or dismissal date
• Jumbo – 7 years from the discharge date

The waiting period calculations get a bit more complicated with Chapter 13 bankruptcy filings.  The Chapter 13 waiting periods are as follows:

• FHA – 1 year from the start of the payout period, as long as the borrower has made all required payments on time.
• VA – 2 years from the discharge date, or if the Chapter 13 is in repayment, the Trustee must document satisfactory payment history for 12 months of the payout period and the court must give permission to enter into a mortgage transaction
• Conventional – 2 years from the discharge date or 4 years from the dismissal date
• Jumbo – 7 years from the discharge date.

So ultimately the good news here is that you don’t have to wait “forever” to apply for a new mortgage after a bankruptcy – unless of course you want a jumbo loan.  (7 years is a long time to wait.)  As always, FHA and VA loans are more “forgiving” of past credit problems.

Do you or someone you know have a bankruptcy in your past and now want to buy a home?  It may be possible to make it happen.  Be sure to work with a lender who will ask detailed questions and help coach you to the best option for your specific situation.  I’ve recently closed loans for multiple clients “bouncing back” after a bankruptcy.  It brings joy to close that loan and help my clients reach another financial milestone following their struggles.  Call me at Dunwoody Mortgage and let’s determine the best option for you or whomever you know with a past bankruptcy.

 

Georgia’s TV and Film Industry is Booming. Forget Hollywood! Put Down Roots Right Here.

On your commute today, you probably passed a yellow TV or movie production sign – they are that common around Atlanta these days.

Look at the numbers:

• FilmLA says Georgia is the #1 filming location in the world.
• 320 film & TV productions will be shot here in 2017, generating $9.5 billion in direct spending.
• The Motion Picture Association of America reports that more than 28,600 Georgians are directly employed by the film industry, while an additional 12,500 people work in production-related jobs.

The movie business may be kind to Georgia, but the mortgage industry traditionally hasn’t been kind to movie makers.

Film and TV studio workers may earn great livings, but they often have irregular employment schedules. Their employer of record can change with each project, and that’s a big red flag for mortgage underwriting. When it comes time to get financing for a home, regularly employed studio employees may be denied because they can’t demonstrate the stable income underwriters demand.

Until now.

I have access to a new loan program that can ease the way to home ownership for film & TV union members. The qualification requirements are simple.

Union members:

• Who receive W-2s as salary employees
• Who have two full years of filed tax returns in the film & TV industry

Underwriting will view the union as the employer, rather than the studio, and the union will be able to verify length of employment. The qualifying income will be based on the monthly average income. The borrower will still produce pay stubs to document current year earnings.

If you know someone in the film & TV industry who complains about renting or apartment life, please forward this email.  They may finally be able to put down roots in the new movie mecca.

 

Waiting Periods After Derogatory Credit Items – Foreclosures

Our nation’s economy has shown positive growth for several years now, following the Great Recession.  Many folks who were hit hard during the recession have rebounded and are doing well now.  Back when times were tough, they may have faced financial crises like home foreclosures or bankruptcies.  These financial crises appear as “derogatory items” on a credit report.

So let’s say your cousin Phil went through a really tough stretch financially.  But he persevered, got that new job, has been paying his bills on time and is saving some money.  He asks you if you think he can win mortgage approval now so he can buy a new home.  Like most people, you really don’t know how to counsel Phil, until now!

You can tell Phil that certain derogatory credit items carry mandatory waiting periods – he must let a specific amount of time pass before he can apply for a new mortgage.  There are different waiting periods for foreclosures, bankruptcies, and short sales.  And the waiting periods also vary by the type of loan Phil can get – FHA, VA, jumbo, or conventional.

Let’s start with a foreclosure.  Phil wasn’t able to make his home payments and the bank foreclosed.  Here are the required waiting periods by loan type:

• FHA – 3 years
• VA – 2 years
• Conventional – 7 years, unless the foreclosure was part of a bankruptcy, in which case the wait is 4 years
• Jumbo – 7 years

It is important to note that the waiting period “clock” starts when the foreclosure deed is recorded with the county.  In some cases, it may take the foreclosing bank several months to document and record the foreclosure deed after seizing the property.  So as a borrower with a past foreclosure, Phil needs to understand that the waiting period clock does not start on the date that the bank seizes the home.  I have run into situations where the bank took quite a few months to record the foreclosure deed, and this little date detail almost delayed the new mortgage.  Many times, the borrower may not know when the prior bank filed the deed after the foreclosure; however, this information is public record and most counties have the data available online now.

We will look at waiting periods after bankruptcies in the next post.  For now, if you or someone you know is like Phil and wants to buy a home, but has a past foreclosure, please refer them to me at Dunwoody Mortgage.  I will pay close attention to the details and even look up the old property online, if necessary, to make sure the borrower meets all lending guidelines.  Don’t waste time looking for a home until you have a high degree of confidence you can close!  I’ll work with you up front to give you the confidence you need.

Competing in a seller’s market

By now I’m sure everyone is aware it is a seller’s market right now. In metro Atlanta, there is less than a 3 month supply of homes available to purchase. For a balanced market, it is good to have close to 6 months of homes available. This is a big change from a few years ago when it was a buyer’s market… low ball offers, take time looking, find the absolute perfect home. Today when making an offer, the initial offer starts at the list price. You better get to a property within day or two of it being listed or it may be under contract, and buyers are making compromises on a home. If the home has, say, 80-90% of what they are looking for in a home, make an offer!

Even with those strategies, buyers can still find themselves being one of many offers on a home in this crowded real estate market. How else can a buyer differentiate themselves from the competition?

                              How some home buyers feel in this market!

One way is being underwritten prior to being under contract on a home purchase. I can start the loan process, send out loan docs, collect financial docs, and submit to underwriting with a “To Be Determined” property address. Once out of underwriting, I can give a letter to my clients for an offer that says “Approved”…. not a prequalification letter… not a preapproval letter… a letter that says the buyer is approved for the purchase pending the appraisal. The buyer can also close in as little as two weeks. We only need the appraisal back at that point!

Looking to buy a home in Georgia? Having problems differentiating yourself from other buyers in this crowded market? Contact me today. I can not only help you get prequalified, but we can submit your loan to underwriting for an approval on the loan. That will give you a major advantage over buyers with a letter that says “prequalified” or “preapproved.”

Why are we not having a faster housing recovery?

Earlier this week, we focused on why the economy was sluggishly turning around. In that post, we touched on how the economy is directly tied to the housing market. The better question to ask could be “why are we not having a faster housing recover?”

Lending guidelines are stricter now compared to five to six years ago. I think we all agree we needed to tighten lending guidelines, but many feel we have over corrected. The biggest problem I see that exists are although Fannie Mae, Freddie Mac and FHA have one set of requirements, many lenders will not lend on those standards because of the concern of a buy back.

A buy back is when a loan is deemed not to conform to the guidelines and the lender is required to purchase  the loan back from Fannie Mae, Freddie Mac, or FHA. This tends to be more prevalent when a loan defaults.

A good example… a lender makes a loan and the loan defaults 9 months later because the buyer loses his job. The agency that owns that loan will audit to see if anything is not correct in the loan package, and I mean anything. If any small thing is found, they will require the lender to purchase the loan back. This happens even if the mistake in the loan file (such as a typo or missed signature) does not correlate to the reason for default. This has caused many lenders to put additional requirements to help mitigate the risk. This creates a tight credit environment, even more so when you add all the government regulation into the mix.

Some feel that if buyers put 20% down to buy a home, it would eliminate foreclosures. The idea is if a buyer has that much “skin in the game,” they would not stop making their mortgage payment.

This is not true. VA loans are 100% financing. It has the lowest default of any loan program available. Perhaps we should take a closer look at the requirements of the VA loan and us this as our standard.

Another area of concern is indications from the government that they want to shut down Fannie Mae and Freddie Mac. Many bills have been introduced to privatize this part of the mortgage industry. It may sound good, but if the mortgage industry privatizes expect interest rates to be roughly 2% higher than government backs the mortgages.

It remains to be seen how this will all unfold, but hopefully the overregulation will come to an end soon.