How It Works, Loan Application

Government Shutdown

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Hello all,

I disappeared for a while, and it shows.  It’s October already!  Work took off and I lost sight of my blog. I’m 12 days late on this post but I thought I would share some of the issues we are seeing with the shutdown:

The IRS is working with only 9% staff. This effects the ability for us to pull tax transcripts. 

Since 2009, Fannie Mae ‘highly recommended’ that lenders pull transcripts from the IRS prior to closing a loan.

What’s a transcript? 

After you file your taxes the IRS turns your income information into an electronic record which can be requested with the borrower-signed form, 4506-T.

Why do we pull a transcript? 

When you complete a loan application, you typically give your loan originator a copy of your tax return by which she calculates your income for qualifying.  It would be possible to give them a fake, unfilled tax return with ’embellished’ income.  To prevent such fraud, we pull the IRS record and compare it with the return you provided.

It’s not required to do this, yet we know Fannie Mae will do it if they audit that loan. To avoid any issues, most lenders have adopted the policy of ordering and reviewing tax transcripts.

http://www.ctne.ws/archives/266

Several days into the shutdown our institution made a business decision to close loans without these transcripts as did a number of other investors.  There are some; however, that refuse to purchase a loan without transcripts and that’s their choice.

USDA is closed. 

The U.S. Department of Agriculture insures loans through their Rural Development program. These loans are currently suspended.

Why?

USDA issues a ‘conditional commitment’ once they receive certain pieces of information.  With no one to issue a conditional commitment, loans are unable to close.

Verification of Employment 

We’ve seen several instances were we have been unable to obtain a verification of employment for government workers. In come cases we can get around it.  There have been instances were getting this information was painfully slow and the closing was delayed.

Business as usual:

For the most part, we have been conducting business as usual with very few delays.  For those of you affected, as frustrating as it is, don’t blame your lender or financial institution.  We are as annoyed as you are with the situation. We are doing our best to work around the issues.

Photo credit: Nick Papakyriazis via photopin cc

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Disclosures, How It Works, Your Mortgage File

The Right of Rescission

Three weeks ago, one of our borrowers exercised the right to rescind.

Most will never exercise this right but should be aware of the details in the event it is needed

The right of rescission applies to several different types of credit, but for our purpose today, I’m referring to closed end credit “in which the security interest is or will be retained or acquired in a consumer’s principal dwelling” (FIDC§ 226.23). In other words, the refinance of your primary residence.

What is the right or rescission?

The right to rescind allows each “consumer whose ownership interest is or will be subject to the security interest” the right to rescind or cancel the transaction. If, after signing your mortgage documents, you desire to cancel the transaction, you have until midnight of the third business day to do so.

When you sign your loan closing documents, you will receive several copies of the right to cancel. I’ve posted a copy to the right. It outlines your right and how to cancel should it be necessary.

Why would you cancel?

I’m sure there are many reasons although in my ten years I’ve witnessed it only twice.

Why?

First off, the process of refinancing can take several weeks, if not months. This leaves plenty of time to determine whether or not refinancing is the right decision. Most will cancel well before consummation of the loan.

Second, regulations require lenders to disclose early on and then obligates them to those charges –within certain tolerance. The right or rescission was intended to provide an escape when a borrower found themselves in a bait and switch – were the terms in the beginning are different than at the closing table.

What happens now that you have rescinded?

Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

In most cases, your lender will require you to wait the three days before they fund the loan. In other words, they will not payoff your previous lender or record the mortgage. The transaction simply dissolves, no questions asked.

Below is a link to the regulation that outlines this right.

FDIC. Law, Regulations, Related Acts § 226.23 Right of rescission

<http://www.fdic.gov/regulations/laws/rules/6500-1400.html >
photo credit: thinkpanama via photopin cc

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How It Works, Your Mortgage File

A number of mortgage questions crop up during a divorce. I remember working with a married couple on the purchase of their first home. They were excited, giddy almost, about this purchase. Three months later I listened as he explained the situation. It was going to end badly and he wanted options.

Another time, a young unmarried couple moved to the area and couldn’t stand the thought of renting. What a waste of money. Nearly a year later she was on my phone, desperate to stay out of forclosure.

I’ve seen it all to often. Each time questions come up:

  • Both of us are on the loan. Can I get the loan in just my name without a refinance?
  • Why can’t I just take my spouse off the title?
  • What happens if I can’t qualify for a refinance?

Unless neither side wants it, the home is awarded to one party. In each situation, the divorce decree will outline who was awarded the home, how the equity is split, and the timeframe necessary to complete these changes.

Let’s tackle the questions.

Both of us are on the loan. Can I get the loan in just my name without a refinance?

Typically, no. The note is a contract which obligates both parties to repay the loan. A refinance is required. You must be able to qualify for the loan under your own financial strength. Once you close on the new loan, the old one will be paid off, removing your spouse from obligation.

Why can’t I just take my x-spouse off the title?

The title or deed is the document that tells us who owns the property. The loan note tells us who is obligated to the debt. The mortgage connects it all together. Make sense?

Think of it this way: Ownership vs. Obligation.

So, removing someone from title eliminates their ownership interest but does not relieve them from their obligation to repay the debt.

Typically, it’s a tradeoff: One party refinances, the other party agrees to sign a quit claim deed to remove any ownership interest.

What happens if I can’t qualify for a refinance?

This is usually the hardest question to answer. A number of things will happen if you are unable to refinance.

Note: A finalized divorce decree is required to complete a refinance transaction. This means a court approved, recorded document. Nothing short of this will work. Divorce situtaions are complex and the terms constantly change until the judge signs and stamps the document.

Run the gamut of options with your lender. There are a lot of programs out there including some tempoary solutions. Be cautious and weigh your options. Tempoary loans like adjustable rate mortgages might offer a solution but will they fit your long term goals?

Try to find a co-borrower. A parent or sibling might strengthen the loan if they are willing take the risk for you.

If you are unable to qualify for a refinance within the required timeframe, you might end up listing the home for sale. If this happens, keep your head up. There will be many good things headed your way.

Remember, good memories are the only invaluable real estate. You’ve got this!

Divorce . . Nasty Business

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Income, Your Mortgage File

Income, Stable and Dependable

Quality-Risk-ManagementRecently, I had a situation where a young borrower applied for a mortgage. Less than a month ago she started a new job but before that she had less than one year of work history. She had good credit but it was recent due to her young age. The underwriter came to me, unsettled.

Why?

In our industry, underwriters are taught to determine if the income is stable and dependable. After all, if you were going to lend your own funds, wouldn’t you want to determine if that person could pay you back?

There is little guarantee when it comes to income. You can be fired, quit or be laid off in a heartbeat.

So, to give us some insight, we look at the history of employment and income. We typically go back two years.  If the borrower hops from job to job, it might be a sign of instability. But, we won’t give up, and we will dig deeper by looking at the borrower profession, and their historical wages. Some jobs are seasonal, and others require people to drift from one employer to another and we won’t penalize someone for this.  Instead, we’ll look back at several years of wages to see what they have historically earned. We will base our decision instead on the continuity of income.

In the above example, does our borrower have a job history worthy of dependability?  If no, then has she demonstrated a continuity of income?  If no, then my underwriter has a right to feel unsettled.  

What if our borrower decides she dislikes her new job and quits?

What if her employer lets her go because she can’t cut the mustard?

What if she has to take a job of lesser pay?

There are all sorts of questions we ask when it comes to income. I realize history can mean little in the way of the future but it’s the only way we can see how that individual handles responsibility. And handling a mortgage is a large responsibility.  So, don’t be discouraged if an underwriter determines your income is not stable or dependable and instead, use it as a learning experience to better your situation. You will be better for it.

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Credit

Judgements

Negative marks on your credit report can happen. Unfortunately, since your credit history is one of the few ways a lender can judge how you manage your finances, any blemishes can cause a great deal of grief. These issues can be embarrassing and so the first response is to gloss over or maybe even try to explain it away. The best thing you can do is to own the issue. It’s a judgement and it’s on your credit report.

The judgement can be pending, open, or satisfied (or some verbiage to that effect).  A pending judgement probably won’t report to your credit report; however, you are obligated to disclose this to your lender when you take application (if you want to know more about this, comment and I’ll blog more about the loan application). An open and satisfied judgement typically will report on your credit report.

A pending and open judgement raise the most concern. A satisfied judgement means you have dealt with the issue although it probably will continue to affect your credit score for a period of time.  Other than the negative affects on your credit score, the lender won’t typically bother you about it.

What’s the harm in a pending or open judgement? A judgement can attach itself to real property. In other words, the judgement will become a lien against your home. Because your home is collateral for the bank the last thing they want is something jeopardizing their position. Among other things, a large collection has the potential to turn into a judgement which is why a lender might ask you to pay it off before you can close.

Regardless of who or why the judgement is in place, it MUST be satisfied prior to or at the time of closing.  Your lender won’t take the risk if it’s not.

My advice?

Pay off the judgement at closing if your lender will allow.

 The reason? 

The mortgage process can take a while, and sometimes they have to re-run your credit report.  If you pay off the judgement before you close and the lender has to re-pull credit your score might actually drop and could jeopardize your approval.  It’s a credit bureau thing so don’t ask me to explain (although I can if you want me to).

How do you satisfy a judgement?

As suggested above, you must pay it off.  That typically means working with the law firm, municipality or individual who placed it there in the first place. You may be able to negotiate a smaller payoff if you work at it but regardless, you must obtain a release of judgement.  Make sure that the release of judgement gets recorded at your local court-house because, once filed publicly, the credit bureaus can pick it up as satisfied for the future.

Now that you’ve taken these measures to satisfy it, all you have to do is sit back and watch your credit heal!

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Assets

Gifts

If you are like me, I’m more than happy to take money you are just going to give away, no questions asked. If you are my underwriter, that wouldn’t be the case. You see, assets are a crucial element in analyzing risk so the source of the money used towards a down payment is carefully considered (If you want to know the reason behind this, leave a comment and I’d be happy to blog more about it).

If you are fortunate enough to have a family member provide you with a money, the first thing we are going to question is whether it’s a gift or a loan. A loan would imply that there is a payment.  And a payment would need to be considered in the borrowers debt-to-income.  A gift, however, suggests no repayment and has no strings attached. Our guidelines tell us that gifts can only come from family members since a gift from a non-family member smells

Gift Letter

more like a loan. It may not make sense but again, I just follow the guidelines, I don’t make them.

If the funds are truly a gift, you must produce a letter signed by all parties that details the following:

  • The name and relationship the donor (family member)
  • The donor’s address and phone number
  • The amount of gift
  • Verbiage that clearly states the money is a gift where not repayment is expected

Now, be careful on how you receive the gift. Since everything has to be documented, you can avoid a paper trail by following this advice. Ask your donor to have their bank prepare a certified cashiers check with their name clearly identified as the remiter. Give a copy of this check to your lender and then hold it for safekeeping until your closing date.

Otherwise, if they write you personal check you will need a copy of that cleared check,and  proof it was deposited into your bank account (bank statements).  In some cases, the bank may even want pro of the donor had the funds available to give.

Avoid receiving a gift in cash!  Cash is not document-able and as far as the lender is concerned, unacceptable assets.

*Again, speak with your lender about this subject and get their opinion on the best way to handle a gift. It can vary depending on loan product and more information might be required.  This will at least give you some insight on what the industry typically wants.

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Income, Your Mortgage File

Writing It All Off

A frequent issue I encounter in working with self employed borrowers is the difference between gross and net income.  Here is a loose definition of gross income:

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Basically, gross income is the difference between all the sources of income and the cost of goods sold.  A solid business has a healthy gross income.

However, net income (or loss) is the gross income minus all expenses. A business has many expenses including wages, marketing costs, and costs they incur to run the operations. In the mortgage industry, we use the net income(loss) with a few exceptions.

Basically, we want to know what income is left over after all the bills have been paid. Many self employed borrowers want us to use the gross income and get quite upset when we are unable. To help rationalize this, let’s consider an example:

A business owner has a gross annual income of $50,000. However, they spend $5,000 in marketing, $2,000 on meals and entertainment, and $3,000 on office products. These are actual expenses where money left the business and paid for expenses the company needed in order to operate. Can that $10,000 in expenses be used to repay the mortgage? No. It was actual money spent on certain costs.

Hopefully you can understand that money that was actually used to pay bills or expenses can in no way be used to repay the mortgage debt and therefore can not be used as income. Tough, I know but lenders want to know what income is actually available to repay the debt.

I am not an accountant so I won’t be able to tell you how to complete your business return to the benefit of obtaining a mortgage loan. I would seek the advice of a CPA or the IRS at www.irs.gov.

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