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The IRS is partnering with Mortgage Companies (sort of)

By
Real Estate Broker/Owner with Highland Realty, Inc 0225 099336

Starting this Monday, if you have any clients who are planning to apply for a mortgage using a “Stated Income” or other limited-document approach, they had better be careful what income they post on the loan application. The IRS has recently overhauled a key income verification tool used by lenders, making it easier and faster to retrieve income tax information of borrowers.

Instead of signing the Form 4506-T at closing as most do, authorizing the lender to pull tax records, many prospective purchasers will be asked to sign the 4506 at loan application. With the new electronic procedures at IRS, the lender will now have actual return information within 24 to 48 hours, thereby enabling lenders to complete income checks before the prospective loan even gets to underwriting, saving time, expenses and spotting potential fraud up front, instead of after closing.

I am reluctant to spend the many hours and effort it takes to get a purchaser under contract, only to learn two weeks into the process that he “mis-stated” his actual income and the loan and the deal goes down in flames.

This change is not a proposal, it coming on-line Monday. To protect your time investments, do you think we should ask the lenders to do this as part of the pre-approval process? What other changes will we need to make in how financing is dealt with to insure we will be maximizing the opportunity to get to closing?

If you are a listing agent, can you be satisfied with the typical pre-qualification or pre-approval letter that says credit has been checked and verifications are pending, but there is rarely a mention about if it is a limited or no documentation loan? As a condition of accepting the offer, can you require the purchaser to direct the lender to submit the Form 4506 to the IRS?

 

Eddy Martinez
Nationwide Funding Group - Highland Park, CA
Excellent Blog. Instead of giving clients those bogus "pre-approval" letters i give them a pre-liminary report which is subject to underwriting and other lender income guidelines. 
Sep 30, 2006 05:18 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Dave,

Stated income loans are the most abused loan product out there.  When I started in the business, they never went above 80% loan-to-value, you had to gave a 660 credit score and a things called "cash reserves".  They were for borrowers who were commissioned or sel-employed.

Now we have stated income for wage earners.  I loved earing a loan officer complain how he had a stated loan declined; his borrower was in the Navy.   "Hey Idiot! His payscale and paygrade is posted all over the internet!"

Stated income loans are the number one reasom for the higher default rates. That stat came from the MBA.

If you have a borrower who is a "stated income loan" , and he's not putting down 30%, here are some of the questions you can ask a loan officer:

1- What is his credit score (You're looking for a 660 or better) ?

2- How much cash does he have AFTER he closes?  (You're looking for six months times the PITI amount) 

3- What does he do for a living and how much is he stating as his monthly income?  (You're loking for something "reasonable" ).  I had a cook from Denny's approved on $7,000 monthly income (as directed by the underwriter).  It was the worst example of cheating the system.  I felt sick about the loan and call the borrower every month to make sure he's on-time.  Miraculously, he is.

Now, here is an interesting fact about the 4506.  You, as a Realtors can take that to an IRS office, and get that info on the spot.  Your contracts and pre-approval forms give you that right (if filed out correctly).  It's a lot of work but as Ronald Reagan used to say:

TRUST BUT VERIFY. 

Sep 30, 2006 05:22 AM
Dave Rosenmarkle
Highland Realty, Inc - Fairfax, VA
33 years of providing fully satisfying service!
Thanks Brian. Do you think this has the possibility of becoming an early and regular step in the loan approval process?
Sep 30, 2006 06:31 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Absolutely, Dave.

I think you should have the LOs you use verify the income and assets before you put in offers.  It's not always easy to get full underwriting approval with out a property but some lenders will do just that.

I try to train my Realtors to have a borrower get me the documentation for their income and assets before house shopping.  After receipt, I usually hammer the 4506 and verify the employment and assets (takes 2-3 business days).  Now I feel that I have a successful "pre-approval'.  At this point, they are looking for homes (usually).  

Buyers go under contract, I get the credit/income package to an underwriter, I have approval in 2-3 days, well withinh the due diligence period for the contract.  Now all I need is an appraisal, hazard insurance,  and title report  and I'm clear to close.

I'll do a blog tomorrow on this
Sep 30, 2006 06:51 AM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes
Very useful information, Dave and Brian. Thanks for sharing!
Sep 30, 2006 07:02 AM
Timothy Butterworth
Taking a break - Portland, OR
Yes this is great information, they say that the stated income can be used properly, but in many cases its is considered the liars loan.
Sep 30, 2006 10:24 AM
Sharon Simms
Coastal Properties Group International - Christie's International - Saint Petersburg, FL
St. Petersburg FL - CRS CIPS CLHMS RSPS
Thanks for the most useful information, Dave and Brian. Sure is good to know upfront what problems might arise.
Sep 30, 2006 11:06 AM
Robert D. Ashby
Cruise Planners of South Florida - Plantation, FL
Providing Personalized Travel
Thanks for the heads up, but I still have lenders requiring the 4506 at closing, not sooner.  Has anyone been notified by a lender of requiring the 4506 sooner?
Sep 30, 2006 11:11 AM
Dave Rosenmarkle
Highland Realty, Inc - Fairfax, VA
33 years of providing fully satisfying service!
My loan officer at Wells Fargo indicated that if the prospective borrower refuses to sign the 4506 at loan application, the application is rejected.
Sep 30, 2006 11:39 AM
Tracy Estridge
Rocklin, CA
The Stated Income loan was designed for Self-Employed borrowers who made a lot of money, but have numerous legal tax deductions.  I bet that different lenders will use this differently.  Be careful, because some realtors may caught in the trap as well.
Sep 30, 2006 12:47 PM
Michele Van Detti
CJR - Gilbert, AZ

Stated income is scary.  I don't shop for houses with my buyers until a reputable lender gives me the full OK.  It's not worth my time at all, (unless it's someone who first came to me as a rental referral from the wife of the pastor in the church that someone very important to my career attends), but that's a whole other story. 

Crazy scenarios nonwithstanding, if you don't have a full aprroval from a lender you can trust who's done his or her homework and has gone through all of the steps, you don't have a deal.  It's ridiculous to take people out to see homes that don't meet their needs and qualifications, and it's a massive waste of time.  I'd rather have a deal fall out in the prequal stages than three days before closing anytime. 

Thanks for the added info.

Sep 30, 2006 09:03 PM
Ray Saenz
Exit Realty Laredo - Laredo, TX
Homes for Sale in Laredo, TX - Texas, Realtor

Dave,

I thought the same, the stated income it is the most abused program, they do fraud, etc  

Interesting blog :)

Ray Saenz, Broker Associate
 United Property Brokers, INC
 Homes for sale in Colorado Metro Denver Area
 Ray Saenz Real Estate Agent & Active Rain  Network User

Sep 30, 2006 10:59 PM
Jacqulyn Richey
Prominent Realty Group - Las Vegas, NV
Las Vegas Real Estate

Great post Dave.  It shows you how important it is to have a great lender working with you to ensure your clients can actually afford what they say they can.

Sep 30, 2006 11:36 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

This is a great topic and is abused. But what about that client that has a few jobs and only reports one of the jobs. Or, that person writes off a lot of stuff. Yes, there are bank statement programs out there. But if I have someone that is a contractor, or is a realtor or owns a real estate company....or has their own consulting job... maybe they are making more now. But they do their taxes and pay the taxes at the end of the year. Their is no true number for income then. What is your take on this?

 I know the other examples that you use. The person in the NAVY....and state that he makes more....  lol  That loan officer and underwriter should both be shot. If they do clamp down on this, hopefully it will knock some of these loan officers out of the business. But you know what..... fraud is becoming more in todays business, because those loan officers were making so much money the last 3 years due to easy business.....and now it's not as easy. They are creative....they just do what's easy. FRAUD.

 jeff

Oct 01, 2006 05:49 AM
Home Design
Alpharetta, GA
Home Design and Real Estate
The mortgage industry will find plenty of ways to get around this.  Come on guys we all know how it works. 
Oct 01, 2006 12:04 PM
AFI Resources
AFI Resources, Inc. - Boca Raton, FL
4506T Processing

These are great ideas you mentioned in your post David.

We are AFI Resources, Inc. - the main service we wanted to bring to your attention today is our etaxrecords - income verification service. We work directly with the IRS on a daily basis, and for our clients we can expedite the processing of the IRS 4506t form [income verification] to within 24 hours.

Please visit us at http://www.etaxrecords.com/ to learn more and register today.

Apr 20, 2007 11:47 PM