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.
- 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!
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:
During the weekend of November 16, 2013, Fannie Mae will implement Desktop Underwriter® (DU®) Version 9.1, which will include the key changes described below:
- The maximum debt to income ratio (DTI) for most programs will be 45%. The maximum loan to value will be reduced to 95% (or 5% down required for conventional financing going forward). Those clients who had a deed-in-lieu or pre-foreclosure sale that haven’t been approvable in the past may now be eligible for new conventional financing.
- The Furlong Team will accept new clients and purchase agreements under the 3% down program until November 15th.
- The Maximum Allowable Debt-to-Income Ratio and Minimum Credit Score Requirements sections below have been combined. DU will not apply additional requirements of a maximum debt-to-income ratio (DTI) of 45%.
- The LTV/CLTV/HCLTV Ratio Cap Lowered to 95% section below has been updated to include information on the timeframes in which mortgage loans exceeding the maximum LTV/CLTV/HCLTV ratio of 95%.
- DU will continue to allow CLTV ratios of 105% when the subordinate financing is a Community Seconds® mortgage.
- Identifying a Deed-in-Lieu of Foreclosure or Pre-foreclosure Sale can now be done manually, where DU was unable to read the credit report accurately before. This may help these clients gain approval.
Read the complete Fannie Mae DU release notes here.