Dan's Blog

Mortgage Loan Qualification Guide for Self Employed Applicants

Dominion Mortgage Inc — Fri, 29 May 2009 15:28:30 -0500

Self employed applicants for a home mortgage loan are income qualified based on the business net profit from the income tax returns. New rules and laws require lenders to verify a borrower's ability to repay the loan by this method. Sometimes self employed mortgage loan applicants are penalized under mortgage loan underwriting rules. Preparation is important because it may take a year or two to fix some problems. Any self employed person who thinks there may be a mortgage loan in their future should read this guide. Please consult your tax adviser or CPA before making changes to your business.

Who is considered self employed?

If you own 25% of more of a business, the underwriter will consider you self employed. If you are an independent contractor, file a schedule C for your work income or your employer does not withhold income taxes, than you are considered self employed by a mortgage underwriter. Employees of Corporations who own 25% or more of that corporation are considered self employed. The underwriter will use your W-2 income plus or minus the net business income for the previous one to two years.

How does the underwriter calculate qualifying income?

The underwriter will look at your net profit to determine your qualifying income. Net Profit is line 31 on the 2008 IRS Schedule C. Depreciation (line 13) and sometimes expenses for business use of your home (line 30) can be added to qualifying income. If you own a partnership or corporation, a few other business expenses can be added to the qualifying income such as amortization/casualty loss and depletion. Farms can add back Co-ops and depletion. Usually income is averaged from the previous two years' tax returns, but not always. We have been able to use the most recent year's income only in some cases.

What should you do to help qualify for a mortgage loan?

• Open a separate business bank account

You business should have a separate bank account and all business bills should be paid from that account. Debts on your personal credit report can be removed from the qualifying debt ratio if you can demonstrate the business pays that debt by showing the last 12 months of cancelled checks from the business account. If the account is not old enough, you paid one month from a personal account or in cash, or debt payments are co-mingled with personal accounts - then that debt cannot be removed from your qualifying debt ratio.

• No new debts

If a debt is too new to provide 12 months of cancelled business checks, then that account will probably be included in your debt ratio. Also, new debt is a usually a derogatory credit score factor. If you plan to apply for a mortgage loan in the next year, hold off on all other new credit.

• Obtain business credit

True commercial accounts usually do not show up on your personal credit report and therefore will not be counted in your debt ratio. Just in case, be sure to pay the debt from your business bank account.

• Co-borrowers and co-signers

A co-borrower is typically a person who will reside in the home and be on the title with the borrower. Income and debts of borrowers and co-borrowers are combined to determine the debt ratio. Often, a co-borrower is a spouse but not always. Co-borrowers equally share individual responsibility for the debt with the borrower.

A co-signer is usually someone who does not live in the home and often is not on title. A co-signer is personally guaranteeing your mortgage loan. They are responsible for the debt. If your business income is not sufficient to qualify, a qualified co-signer can make the difference. Not all loan programs allow co-signers.

• Establish a history

Two years is the typical requirement to use self employed income. Sometimes, a shorter time period is acceptable.

• Get listed

Often, the existence of the business for two years must be verified. Typical ways to do this are by business licenses, a CPA letter or a yellow pages listing. I have encountered some self employed borrowers who can provide none of these. This can present a challenge. We find a way to verify the business exists, but it is faster and easier to do so if you follow the conventional means.

• Balance deductions with qualifying

No one enjoys paying income taxes. There is sometimes a choice to be made between paying income taxes and the ability to qualify for a mortgage loan.

• Get pre-approved for your home loan

The first step to buying a home is a pre-approval for your home loan. Bring your income tax returns to your mortgage loan officer. Different loan programs have their own rules - Fannie Mae, Freddie Mac, FHA, VA, USDA and so on. Meeting with a mortgage loan expert is especially important for the self employed applicant.

Contact me when you are ready for your mortgage loan pre-approval. Small business owners and self employed customers are a specialty of mine. I serve the business community on the executive board of the Nazareth Area Chamber of Commerce and other organizations. In addition, my eleven years experience in the mortgage loan industry and personal experience as a third generation small business owner helps me relate to and assist my self employed customers.

30-year fixed rate mortgage gets its sexy back

Dominion Mortgage Inc — Sun, 12 Oct 2008 09:27:09 -0500

Someone asked me for an interest-only rate the other day and I was a little shocked. Mostly, people have heard and read enough about the problems in the mortgage industry to steer clear of ARMs and interest only loans.

There is a place and time for those loans. There always was, but never the nearly 50% share of loan originations they enjoyed during the exotic loan heyday. About 5% would be correct in my market.

A 30-year fixed is a great, safe loan program. A 15-year fixed is even better provided the payment is affordable. Perhaps this is not the loan that Warren Buffet would take, but most of us cannot pay our mortgage loan off in a pinch. Security and stability should be the first concerns with perhaps the largest debt of our lives.

Why were exotic loans so prevalent? Simple, triple the profit for loan officer and mortgage lenders. A 30-year fixed rate loan is easy to shop and compare. Pricing is very competitive and margins are narrow. Some loan officers, usually at their companies direction, developed slick sales pitches to trick people into exotic loan programs where interest rate competition was no longer a factor and profit margins tripled.

Mr./Mrs. Homebuyer, you qualify for an exclusive loan program reserved for only the most qualified people and you are obviously smart and savvy enough to recognize this excellent financial opportunity. The 'interest' rate is 1% instead of that stodgy old 5.75% 30-year fixed. That was your father's loan program! Your neighbors will revere and envy you!

-If the borrower read the papers, and no one did, they wouldn't have understood the loan terms. The person they asked to explain them - the loan officer - has a stock of canned responses to steer people away from the pitfalls and remind them how smart the were to select this wonderful new loan program. (by the way - the loan officer rarely understood the terms themselves, they just sold it)

People were betrayed by the loans officers that they trusted to guide them through the mortgage loan process. Many of those shady loan officers and many companies, including some very large ones (Wachovia, Countrywide and Washington Mutual were deep into Option Arms), are out of the mortgage business now, but some still survive.

I wonder what the next scam loan program will be? For now, it is the bait and switch business, offering a low interest rate they could never actually provide and then coming in days before closing with the real rate, a higher rate of course. Guess what? Consumers have little legal protections against this. Consumers - be careful. If you cannot be sure you are dealing with a reputable person and company then move on! Big is not safe, we have all learned that and if the deal sounds too good to be true - you know that it is!

In the age of cyberspace, running a local mortgage company is perhaps novel. But my customers all know where to find me. I am involved in many local organizations and out there in my community every day. For ten years I have been putting people first and I never engaged in the exotic loan business. I own my company, Dominion's reputation is tied to my own - there is no difference. Many loan officers are changing companies these days. You have to wonder why.

Get information online, then get your mortgage loan locally. There are honest companies that are not local, but it is just not worth the chance.

Gah! They got me. My buyer's mortgage company blew it. No closing.

Dominion Mortgage Inc — Thu, 02 Oct 2008 15:15:03 -0500

I own a vacant house in the boondocks that went under contract to sell eight weeks ago. We were supposed to close Tuesday.

Everything was going great they all said.

Instinctively wary, I spoke to the buyer's loan officer Monday, at her invitation, and she said we were in line for closing docs - all set to close!

Needless to say, we did not close, might never close and who knows where things stand because in the aftermath CYA is the order of the day. The loan officer has demonstrated I cannot count on what she says.

The irony is I've been a mortgage broker for ten years and my customers close on time, I go through great pains for that. If one of my loans is not ready to close 5 days before closing, I roll up my sleeves and get it ready. But this rarely happens because good work up front prevents problems later. I trained my staff to do the right work up front and they are very good at what they do. That has earned me a lot of referrals and many loyal realtors.

Sadly, this shady loan officer probably cost her clients a home. The buyers were probably very nice people who counted on their loan officer's word. The loan officer swears she will get it done still, but what she explains does not not add up.

Touche! I am a victim of the pirates in my own industry. Enjoy.

The Silver Lining of the Credit Crunch

Dominion Mortgage Inc — Thu, 02 Oct 2008 14:44:43 -0500

Does anyone else think credit of all kinds was just too loose and easy?

We do not want those days back, right?

The combined credit card debt of Americans built to $1 trillion as the savings rate dropping into negative territory. Buy it fast, buy it now! Right from college into a McMansion with two Beamers in the garage and a flat screen tv. Lots of shiny, shiny stuff! and zero real wealth.

Leverage (credit) exacerbates gains and losses and isn't that where we now are? Personally, i like a little stability but then I am a dull guy especially when finances are concerned. I like low risk when a family's home is on the line. Buy the big home next time.

Yet I hear the bailout is intended to help loosen credit. Okay, but it is important that we find a balance and not invite the same problems.

Now for the silver lining - I hear more now from customers who want to make sure their mortgage payment is affordable, who are 100% sure they want a fixed rate loan, who want to build a resilient financial plan and who understand how important their credit rating is. Instead of insisiting on maxing out their purchase price, they call me with a conservative target payment already in mind. Music to my ears. This is great stuff, this is what it takes for good long term financial health and prosperity.

Could FHA be in line for failure?

Dominion Mortgage Inc — Wed, 01 Oct 2008 09:00:33 -0500

-nearly 15% of FHA insured loans are 30 days late or more (MBA)

-when subprime vanished, FHA became the loan of choice for credit-challenged cases

-as MI companies, Fannie Mae and Freddie Mac became more restrictive FHA became a more attractive program for many borrowers including some with strong credit standings; this trend continues

-FHA is slow to react to market conditions, the risked-based pricing moratorium is a recent example

FHA is a hybrid political and financial organization and it is the political arm that keeps it afloat in times like this. If it were a private agency, if would be in worse shape than Fannie Mae and Freddie Mac based on delinquency rate alone.

FHA's market share has grown from about 1.6% or loan origination in 2006 to about 30% currently. As FHA becomes more restrictive by degree, it could be another blow to the housing market and to homeowners.

FHA has increased the upfront MI and monthly MI on many loans and is increased the statutory minimum investment from 3% to 3.5%. Also, down payment assistance programs were recently banned. I expect further tightening as loses mount.

FHA is the only program available to many people now. Let's hope the FHA program, as we know it, holds together and let's do something about it, lend your political support to the program.

Ten years from now, today's buyers will be hailed as geniuses.

Dominion Mortgage Inc — Fri, 26 Sep 2008 09:51:43 -0500

Not only does that just feel right,I really think it is true. Certainly, the past has demonstrated that.

Not a big Robert Kiyosoki fan, but didnt he get rich buying real estate in California when the market was dismal? I imagine many people who own a lot of real estate in towns and citites across the country did exactly the same.

A past customer of mine who moved out of state purchased three rentals and they are doing really well. Now they want to start buying homes in this area. They had a rough time a while back so I am proud of them - if that makes any sense. I think ten years from now they will be set because of their wisdom and courage.

In ten years, those who sat on the sidelines will kick themselves for giving in to irrational fear which seems so real and logical now but in retrospect will look almost ridiculous. They will say, I could have had that home for $200,000, now it's selling for $500,000! and they will regret their hesitance.

I think one one hand people know they should be buying now (if they can get a loan but that's another story), but on the other hand many people cannot overcome the pyschological fear and the powerful but useless tendency to run with the herd.

Daniel D. Thierry, CRMS

Mortgage Professional, Real Estate Market Guesser

Your FICO Credit Score - How Is It Determined?

Dominion Mortgage Inc — Tue, 16 Sep 2008 13:22:55 -0500

Fair Isaac, the creator of the fico scoring model, reports the following factors determine a fico credit score:

35% payment history
30% balances owed
15% length of history
10% new credit
10% types of credit used

The percentages reflect how important each of these factors are.

See any surprises there? What about inquiries? They do not even make the list. Most of these factors are intuitive, but the second largest factor: 30% balances owed, takes many people by surprise. The key is to keep you credit card balances low, below 30% of the credit limit preferably.

Fair Isaac does not distinguish between a credit card with a $10,000 limit compared to a $300 limit, the utilization factor is the same so closely watch those accounts with low credit limits. If you are planning to apply for a loan, pay your credit cards down at least two months in advance of your application.

Visit my website: www.dominionrates.com for links to credit education and repair resources. Now more than ever fico scores are important.

Contact me with any questions about credit and mortgage financing: dan@dominionrates.com

Daniel D. Thierry, CRMS

Sr Mortgage Advisor and Credit Repair Specialist

$7,500 tax credit - a gift or a sham?

Dominion Mortgage Inc — Fri, 05 Sep 2008 08:36:53 -0500

The details are out by now. Essentially this $7,500 income tax credit for first time home buyers is a fifteen year interest free loan.

SOUND THE TRUMPETS

At first I was admittedly a little disappointed that the tax credit was really a loan, but I have come to realize that this is still a great program.

Who wouldn't take a 15-year interest free loan? and what better time then when you but a new home. Also, if the home is sold before the tax credit is paid, the balance, up to the capital gain, is paid off that year.

A savvy tax accountant explained to me this morning that a person who took the tax credit could withhold an extra $25 from each paycheck to the income tax returns out, or better yet, put $25 into the bank each pay so you are earning interest on the money you received interest free!

First time home buyers, this might not be the perfect time to buy, but it is the right time. Do you know what happens to people who wait to buy in at the perfect time? Ask a stock broker. Remember too, this income tax credit is availble for only a limited time.

We love first time home buyers. You are the reason I got into the home loan business. We offer the programs best suited for first time home buyers, know where to find the local grants and community loans, and how to save you money and give you security with your home loan.

When the occassion calls for it, I have some miracles up my sleeves. Contact us for a no obligation, FREE pre-approval.

Say Goodbye to No Income Verification Loans (aka Stated Income)

Dominion Mortgage Inc — Sat, 30 Aug 2008 09:19:13 -0500

I just received another notice from a major lender that is dropping their stated income (no income verification) home loan program. This is the third top ten lender to drop these programs this month.

There are only a handful of lenders left and I think the end is near for these programs - too many defaults, too much abuse, too much pressure from lawmakers and regulators.

I do not remember ever having to supply a pay-stub or tax returns with a car loan application. The lender went by the income I put on the application and approved the application on the spot. Is that not stated income? How about credit card applications? I never sent income documents with those applications either.

Perhaps some niche players will remain for these types of home loans, if the law allows, but the terms will not be attractive. It is the end of an era.

Personally, I liked these programs to offer document relief to highly qualified clients. It was nice that engineers with 800 ficos did not have to chase down paperwork. Alas, those days are over.

How to Get a Free Copy of Your Credit Report

Dominion Mortgage Inc — Wed, 27 Aug 2008 13:34:36 -0500

In most states, consumers are entitled to a free copy of their credit report every twelve months.. The report is available online at www.annualcreditreport.com. This is the official website sponsored by the three major credit bureaus for this purpose.

The free credit report does not come with fico scores. The scores cost extra. :/

To master your credit score or learn more, here is an excellent set of resources from Fair Isacc, the creator of the fico scoring model: http://www.myfico.com/CreditEducation/?fire=1

There are a lot of authorities on fico scores, but since Fair Isaac is the actual developer of the fico scoring model, I consider them the froemost experts.

Credit restoration programs are available or a knowledgable consumer with time on their hands can do that for themselves. It is an arduous but rewarding process. Beware of scams that make unrealsitic promises such as boosting your fico score 100 points in a week or giving you tradelines that are not really yours.