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Mortgage Underwriting Tidbits

Mortgage programs are becoming more flexible for different scenarios.  Although guidelines are strict and offer little variance from the rules, at least we are starting to see rule changes.  Some of these may help you get approved for a loan when you couldn’t before.  Others might present obstacles.  Let’s take a look at a few underwriting tidbits that are relatively new in the last year.

Down Payment Funds

The minimum down payment for conventional financing was reduced to 3% of the purchase price.  Resources are available to help with this based upon the location of the home or a borrower’s income.  Some home buyers get creative with where they get their down payment funds.  Here are a few rules to know:

  • All funds used in a real estate transaction must be sourced.  If your rich uncle Jimmy is giving you money as a gift, be prepared to show a copy of the check you received and have Jimmy sign a gift letter.  If you are selling baseball cards, cows, a truck, snowmobile or those gold bars you have been stashing in a secret hole behind grandma’s house, get a bill of sale and have the seller provide a check.  Cash is not traceable and cannot be used!  Underwriters need to do a look-back for 60 days on your asset statements, so any big deposits you have in there also need to be sourced.
  • You may use gift funds with all loan programs.  Hey, we all know saving up money is a challenge.  If mom, dad, grandma, or uncle Jimmy wants to give you some money to buy a house – take it!  Don’t expect underwriting to accept gift funds from some random college buddy that lives in Montana though.  Many programs have rules that require gift funds come from a family member or employer.
  • The Minnesota Housing Finance Agency may have money waiting for you.  We’re a proud partner with this Agency to offer down payment assistance, which allows a home buyer to own a home with as little as $1,000 for down payment.
  • Marry an eligible veteran and you won’t need a down payment.  VA programs don’t require a down payment up to a $417,000 purchase price for eligible veterans with full entitlement.
  • Creative financing is allowed for a down payment.  Creative what?  Think of all of your assets – not just the car and diamond earrings you inherited from Grandma.  Your 401k may offer loans that you can use for the down payment.  If you have stocks, bonds, IRAs, whole life insurance – many times you can take a loan against these assets or open a margin account.  Basically, borrowed funds can be used for the down payment as long as the loan is secured to an asset.  No, you can’t use a credit card to buy a house because it is unsecured.

Student Loans

  • Minimum payments – let’s say you owe $25,000 on student loans and your minimum payment is $80.  First, it would take quite a while to repay that loan with that payment amount.  Underwriting for Fannie Mae and FHA require that 1% of the balance be used as a minimum payment for qualifying.  However, Freddie Mac programs allow us to use the minimum payment as long as an income-based repayment plan is in place.

Self Employed Income

  • Distributions to owners on K-1 statement are needed in order to use the income from the business (corporate income) as personal income to qualify for a loan.
  • Calculating qualifying income for self employed borrowers can be easy or really complex, depending upon the tax filings.  You need to report and file business income with the IRS on at least the most recent tax year to be able to use the income, and generally two years’ worth if this is a new enterprise for you.  Some programs allow one year, but only with prior experience in the industry or profession.  At the most general level, self employed eligible income is the combination of net profit and non cash deductions (depreciation, depletion and business use of home).  Our best advice – get your personal and business tax filings together and in the hands of a self employed income expert Loan Officer to review and analyze.  If you are a do-it-yourself type, you can try it for fun here: http://www.freddiemac.com/learn/lo/forms/form_91.html

Disputes on Credit

  • Disputes on your credit report will exclude those account details from the calculation of your credit score, thus artificially inflating or deflating your score.  They need to be removed at the credit bureau level.  Here’s our blog on removing disputes: https://furlongteam.com/blog/removing-disputes-credit-report/

Roommate and Household Income

  • Roommate income, or boarder income, can now be used to qualify for a home loan.  Keep in mind that this rental income needs to be documented for 12 months.  If you and your buddy are renting an apartment, you’ll want a lease between the two of you and have rental payments go directly to you and not the landlord.  Same goes for the tenant in your basement – have a lease and document the rent payments for 12 months and you could use this to qualify for a refinance of your home.  The Fannie Mae Home Ready program also allows the use of other household income to help you qualify for a loan even if you are the only borrower.

The mortgage industry changes every day with new updates, regulations, technology, volume of business and oh yeah – interest rates.  Our best advice – get in touch with an expert Loan Officer before you get too serious about shopping for a home.  The last thing we want you to do is ride all over town with your Realtor looking at homes that you won’t be able to buy.  Our other advice – send in everything upfront so your Loan Officer can review all of the documentation and alert you of any potential issues early on.  Generally when we have the time, most issues can be fixed or resolved.  They are all saying it, but now really is the best time to buy a home!

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Online Mortgages – What A Buyer Should Know

These days it seems offers are everywhere online to get an approval and complete a loan.  Many of these offers seem great and easy to complete.  And in some cases they are.  What is important to know is how it works, what the risks are, and how to go about determining which offers are legitimate and which are not.  Here is a quick tutorial and a quick reference guide to navigate you through the wires of an online mortgage:

How the online process works

Online technology has evolved to a point where it is easy to communicate information and documentation, even if you know little about computers.  Entering information into an online form, such as a mortgage application, is fairly straight forward.  Click the apply online button, enter your information such as employment, income, credit, assets, address, identifying information and press send.  Viola, the check arrives in the mail!  Not so fast – a lender is required to verify your information submitted via documentation and determine your ability to repay the loan and meet loan qualifying criteria.  However, entering an online application these days is a snap!

What is needed from you

Once the lender does an initial review, they will request your documentation (pay stubs, W2s, tax filings, bank statements, identification, and other items specific to your application).  Today, many lenders have the option for you to upload your documentation directly into your loan file.  This used to be referred to as FTP, or file transfer protocol, but today is as simple as click “upload file” and then select the file from your computer.  The days of faxing documents, or even bringing them into a Loan Officer’s office, are quickly slipping away.

With the application complete and your documents uploaded, the lender can then process and underwrite your loan.  Some lenders are trying an automated system that notifies you of missing items while other will have an assigned Loan Officer inform you of any additional needed items.  Also, some lenders will allow you to complete your lock on your own and others will have the Loan Officer discuss lock options with you via phone.

The entire process can be done online without ever having to go to a lender’s office or even talk with a Loan Officer.  Seems great, doesn’t it?  For some, the convenience of it is very appealing, but for others who want to understand and know how all the moving pieces work need a Loan Officer to assist them with the process and information.

Know the risks

It is very important to know the risks!  The first risk is when you are purchasing a home, Realtors want to connect with a Loan Officer who knows your file.  If you submit an offer with a pre-approval letter from a lender with whom you have yet to communicate, the Listing Agent on that home may not accept your offer.  They will want to confirm with the lender that your documents have been reviewed, as well as credit score and some level of underwriting.  The listing agent will also want confirmation that you can close on time, and they want a go-to person with your lender who can provide timing and tracking updates.

The second risk is obvious – know who you are doing business with!  Some online lenders make all the promises, but may fail to deliver.  Reputation in the marketplace is important.  Do your research!  The Better Business Bureau, Department of Commerce and 3rd parties such as your Realtor, Zillow, Trulia and others are good ways to verify your lender is legitimate.  Not only are you submitting personal documentation to a lender you are not meeting face to face, you are also pinning your hopes and dreams of homeownership to this company.  Make sure they have a great reputation.  Another way to look up a company or Loan Officer is via nmlsconsumeraccess.org.  The NMLS system, or Nationwide Mortgage Licensing System, has the licensing data for each company and Loan Officer.

The third risk is having a point of contact.  Even the highest qualified borrowers will run into things that need to be corrected or problem solved.  If your loan application is in the hands of a machine and not a lending expert, who do you go to when an issue arises?  It makes great prudent sense to connect with a lender first before going through the online application process to make sure you have a contact that can help if the need arises.  Research the person as well to insure he or she is licensed and has the know-how to make sure your loan gets done, on time, and delivers the terms you are expecting.  Reading Loan Officer reviews on Zillow is a good way to get to know who you are working with, or use the trusted guidance of your expert Realtor to assist you.

Guide to the CFPB

Overall, completing a loan online is more efficient, flexible with your schedule, and can yield a positive experience if coupled with an expert Loan Officer and a highly reputable local lender.  The CFPB has a guide on shopping for a loan (Download the CFPB Guide) and a lender should provide you with a Loan Estimate within 3 days of your completed application (includes your name, income amount, Social Security number and birthdate to obtain a credit report, a property address, an estimated value of the property, and the mortgage loan amount sought.

3% Down Conventional Fannie Mae and Freddie Mac loans

Both Fannie Mae and Freddie Mac reintroduced conventional 3% down programs this year.  A few key differences to note:

Fannie Mae requires at least one of the borrowers to be a first time home buyer.

Freddie Mac Home Possible has income limits you can look up by clicking here.  The Home Possible program also has reduced mortgage insurance.

Both programs allow the 3% down payment to be entirely gifted by a relative, employer, or a community 2nd down payment assistance loan or grant.

More guidelines apply and we can help you with an approval in a short amount of time.  Complete a pre-approval request online and we can get you started right away: furlongteam.com/preapproval

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Selling and buying in a seller’s market

We have had many clients lately that have needed or wanted to sell their current home and buy another, so we wrote up some tips about buying and selling your home in a seller’s market.

Selling Your Home in a Seller’s MarketSelling your home in a seller's market

The sell side is generally the easier part (though it may not seem that way as you are painting and boxing up all your belongings getting the house ready for market). The market is currently a very strong seller’s market, which means offers contingent on the sale of another property are not as strong.

Buying a Home in a Seller’s Market

We work with our clients to devise a plan for getting approved for the next purchase without having to sell their current home, or strategies for interim financing to utilize your current equity towards the purchase of a new home. In addition to this, with all the constraints this process has, we as your lender will be flexible to meet timeline demands, concurrent closings and can assist in getting contingent offers accepted.

Planning early is never too early and we can help devise a specific strategy for you to make the transition.

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FHA Streamline 203(k)

The Furlong Team is pleased to offer the FHA Streamline 203(k).

A few quick things to know about 203(k):

  1. Find your contractor early. They need to be licensed and should be organized with their paperwork!
  2. Repairs should not require large structural changes.
  3. The timeline for closing is longer than standard mortgage programs.
  4. The underwriting process has more details and will be a bit more work than a standard loan program, but just have patience and you will be ok!

FHA’s Streamlined 203(k) program permits borrowers to:

  • Finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in
  • Finance funding to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser

FHA offers insurance to lenders for two repair programs – the 203(k) Streamline and the standard 203(k).

Eligible repairs include, but are not limited to:

  • structural alterations (not applicable on Streamline (k))
  • additions (not applicable on Streamline (k))
  • reconstruction (not applicable on Streamline (k))
  • remodeling (only minor remodeling allowed on Streamline(k))
  • new siding
  • plumbing
  • painting
  • decking
  • heating and/or air-conditioning
  • electrical systems
  • roofing
  • flooring and carpeting
  • energy efficient improvements
  • major landscape work (not applicable on Streamline (k))
  • pool repairs and pool fences.
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    Documenting Assets for Closing on a New Home and Deposits

    When I talk about documenting assets with new borrowers, I often get questions like: “why do I need to document funds for closing” or “why do I need to show where this deposit into my account came from?” It is required of borrowers to source all deposits into documented asset accounts over a certain amount or cumulative amount, depending on the loan program guidelines.

    How long do I need to document assets?

    Generally, we only document the last 60 days’ period of the asset statements (last two months’ bank statements). Deposits not only need to be explained, but they need to be sourced as well.

    What kinds of deposits should I document?

    For example, if I see a deposit into a bank account for $1,200 it is required that we have a copy of the check and proof of the source. If the funds came from a relative, it is considered gift funds and must be eligible under loan program guidelines. If it is from the sale of an asset, it is required to provide a bill of sale and copy of the check. If the funds are wired in, the source needs to be documented (letter from the company explaining why they sent funds).

    Many times funds wired to an account show where they are coming from (IRS, company payroll, etc) and then we don’t need any further documentation. Sometimes the deposit can be “backed out” of the statement ending balance if the source cannot be documented (cash, for example, cannot be traced/sourced), other times that asset account can be deemed ineligible as a source for closing funds.

    Bottom Line: use caution

    Bottom line, if you plan to purchase a home, be careful about the money going into your account for 2 months leading up to the underwriting. Mortgage investors have strict guidelines in regards to documenting funds for closing as this is an area where fraud has frequently occurred in the past.

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    Fannie Mae and Freddie Mac 3% Down Payment

    Fannie Mae and Freddie Mac have recently reintroduced the 3% down payment conventional programs. Many benefits are available for home buyers with these programs including reduced rates, reduced mortgage insurance and, of course, a lower down payment!

    Some differences between Fannie Mae and Freddie Mac are as follows:

    Fannie Mae 3% Down Payment:

    • Purchase or rate/term refinancing only
    • Homebuyer education is required
    • At least one buyer must be a first time homebuyer
    • Single family, primary residence only
    • Down payment assistance loans allowed (must be a Community Second)

    Freddie Mac Home Possible 3% Down Payment:

    • 680 minimum credit score
    • Homebuyer education is required
    • None of the buyers are required to be first time buyers

    Watch our informative overview video here:

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    FHA Streamline Refinance Program

    The FHA Streamline Refinance program waives the requirement for an appraisal, allows for the new, lower FHA mortgage insurance rates, and can save homeowners a lot of interest and insurance fees over the life of the loan. Not to mention, your payment will be reduced without needing to add additional time onto your loan term!

    Request a Quote

    From http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/streamline:

    FHA has permitted streamline refinances on insured mortgages since the early 1980s. “Streamline refinance” refers only to the amount of documentation and underwriting that the lender must perform, and does not mean that there are no costs involved in the transaction. The basic requirements of a streamline refinance are:

    • The mortgage to be refinanced must already be FHA insured.
    • The mortgage to be refinanced should be current (not delinquent).
    • The refinance results in a lowering of the borrower’s monthly principal and interest payments, or, under certain circumstances, the conversion of an adjustable rate mortgage (ARM) to a fixed-rate mortgage.
    • No cash may be taken out on mortgages refinanced using the streamline refinance process.

    Lenders may offer streamline refinances in several ways. Some lenders offer “no cost” refinances (actually, no out-of-pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the lender pays any closing costs that are incurred on the transaction. FHA does not allow lenders to include closing costs in the new mortgage amount of a streamline refinance. Investment properties (properties which the borrower does not occupy as his or her principal residence) may only be refinanced without an appraisal.

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    Conventional Mortgage Insurance Options

    About Mortgage Insurance

    Private mortgage insurance is required for borrowers of conventional loans with a down payment of less than 20% of the purchase price. Mortgage insurance is an insurance policy for the lender that provides coverage to the lender in the event that the borrower is unable to repay their mortgage.

    There are several options for paying the premium:

    • Monthly Premium: The borrower pays the same amount every month until the loan balance is paid down to 78% of the initial property value, at which point the mortgage insurance payments end. There is no initial premium at closing.
    • Single Premium (Refundable): The borrower makes one lump sum payment at closing, but receives a partial refund if the loan is terminated within 5 years. There are no monthly payments.
    • Single Premium (Non-Refundable): The borrower makes one lump sum payment at closing. There are no monthly payments.
    • Single Premium (Lender Paid): The one-time lump sum payment is paid by the lender through a higher interest rate for the borrower.
    • Split Premium: The borrower pays a portion of the premium upfront and a portion in monthly payments.

    Mortgages Unlimited 2014 Holiday Toy Drive for Cornerstone

    As a company, we find a variety of causes to get behind and help, from Habitat for Humanity to Spare Key. This year we made an extra push to collect some holiday gifts for those who don’t have the means on their own. Each of our offices piled up things for kids, dads, moms and families to help make their home just a little bit happier over the holidays!