TGIF - another week and more changes - I wanted to bring to light the self employed client and the types of info that is needed in order to qualify.  We've used pretty standard calculations and analysis over the years but recently the policies have become a bit more stringent.  Copied below is some info from one of the policy manuals and also a commentary from a well known industry expert.  When you are dealing with a self employed client be sure to have their income calculated by a lender before allowing a sales agmt to be drawn up. 

Have a great weekend -   

Silver lining in cloud of foreclosure:  A good friend of mine just sent me this message - sometimes we need to let go in order for our lives to take a turn.  I figured this message would be an encouragement in the midst of the foreclosure doom and gloom:  PRAISE:  Truly miraculous!  X and X have been able to rent a house that's bigger, better, gorgeous, fully furnished, on the McKenzie River, and the owner wants X to sign an addendum stating he has the right of first refusal to buy it after 6 months if he wants it.  The current owner has had this $700K, 3600+ sq ft property on the market with no offers, and he's personally very wealthy and wants to move back to Colorado to be with his family there.  Doesn't want to bother packing furniture, etc., and asked X if it would be ok for him to leave all the high end furniture there.  God Reigns!!!   X said God's been asking him to let his current house go, and X been agreeing but trying to talk to God to find out why, but also trying to be compliant with God's Will - ya can't have it both ways.  As X was leaving to meet with the owner of the River house yesterday, he was served with the foreclosure papers as he walked out of his house - God's timing.  X was just giddy he was so excited about this blessing, and could barely get the words out without a chuckle.  God is so good, Praise Him, amen! 

From Think Big, Work Small

Treasuries and mortgages are weaker this morning. Interest rates preparing for next week's auctions and this morning the stock market is opening better. No economic releases today. The dollar is weaker again this morning adding to the improvement in equity markets early on. With the Fed adopting an easier money policy (printing money) with QE 2 almost a certainty, the dollar continues to weaken fueling the idea that a weak dollar will improve exports. Much talk out there that a weak currency increases the global competitive advantage is heating up to what some believe is the beginning of a global currency war with every country beating down their currency to gain an advantage; an advantage overblown in our judgment but it is the consensus for the moment.

The G-20 meetings have Tim Geithner talking the talk; saying the US favors a strong dollar while the fed is set to weaken the dollar further with QE 2. Repeating themes he has pushed for the last month, Geithner said at the meeting not to seek "competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency." Geithner suggested to counterparts that current account deficits or surpluses of no more than 4% of gross domestic product be the aim. The IMF this month estimated China's surplus will swell to 7.8% of GDP in 2015 from 4.7% this year. The U.S. wants the IMF to monitor progress if goals are adopted. Lots of talk with little substance, makes for headlines but as long as the Fed is printing money the US dollar is unlikely to gain and more likely to fall further. Every country trying to get an advantage in exports is increasing concerns from policy makers and investors that the friction will spark a round of devaluations and retaliatory protectionism, derailing an already fragile global economic recovery. G-20 finance chiefs plan to say members will refrain from "competitive undervaluation" of currencies, said an official from a member country, citing a draft statement and speaking on condition of anonymity.

German business confidence is improving. The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, rose to 107.6 from 106.8 in September. That's the highest since May 2007. Economists had expected a drop to 106.5, according to the median of 38 forecasts in Bloomberg News survey. Surging exports helped Germany's economy expand 2.2 percent in the second quarter, the fastest pace in two decades.

Europe's stock markets are trading lower this morning while the US stock market opened a little better. US interest rates increasing in preparation for next week's $109B of auctions ($99B of 2s, 5s and 7s, $10B of 5 yr TIPS). Mortgage prices opened soft but have moved off the worst levels, however with little direct influences to trade from don't expect much frm the bond and mortgage markets today. Last week Treasury auctions of 3 yr, 10 yr and 30 yr notes and bonds did not meet the expected demand, next week's auctions are worrying traders somewhat.

From Dick Lepre, San Francisco 

Friday October 22, 2010

No significant economic data today.  Treasury Secretary Geitnher's G20 comments about somehow restraining trade gaps make little sense to me.  If the entire point is trying to get China to revalue their currency everyone is missing the issue that China's present pegged system is doomed anyway.

(From Freddie Mac) Long-Term Mortgage Rates Rise Slightly  

 

Shorter Term Rates Fall To Record Lows

McLean, VA - Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), which found that the 30-year fixed-rate mortgage rate rose slightly for the first time in five weeks. The 15-year fixed-rate mortgage rate also rose slightly while the 5-year ARM and 1-year ARM fell.

Quotes

Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac.

•·         "Mixed inflation signals kept fixed mortgage rates at bay this week. The headline producer price index jumped 0.4 percent between August and September, which was quadruple the market consensus, while the consumer price index fell below the market forecast. Rates on the traditional 1-year and 5-year hybrid ARMs eased to all-time record lows.

• "Meanwhile, the housing construction market is showing some signs of promise. New construction on one-family homes rose 4.4 percent in September to the strongest pace since May. In addition, homebuilder confidence rose in October to the strongest level since June, according to the NAHB/Wells Fargo Housing Market Index."

  

  

Policy Guidelines for Self Employment Income

When the applicant owns 25% or more of a business, the applicant must be considered self-employed even if income is not used for qualification.

Employment income must be verified by obtaining:

·         The individual applicant's signed federal income tax returns for the most recent tax year,

AND

·         All applicants are required to complete, sign and date IRS Form 4506-T at application and at closing.

·         The signed Form 4506-T must include authorization for transcripts for the two most recent years. Both 4506-T forms are required to be retained in the loan file.

·         The Form 4506-T signed at application (i.e. the Form 4506-T sent in the three-day package and completed/signed/dated and returned by applicants) must be executed

·         When required, IRS transcripts of tax returns must be obtained to validate the income documentation provided by the applicants and used during the underwriting process. When multiple tax returns are used (e.g. 1040, 1020, 1065), a minimum of the applicant's personal tax returns must be validated. For wage earning applicants who are not required to provide tax returns, it is acceptable to obtain W-2 transcripts. If warranted, additional documentation and transcripts may be required. The transcript information must be retained in the loan file. All discrepancies between the income verification documents and the transcript information must be adequately explained and documented.

AND

         Verification of existence of the business through a third party source no more than 30 calendar days prior to the Note date,

AND

  

·         YTD profit and loss statement signed and dated by the applicant if the application is dated more than 120 days after the fiscal year end. The profit and loss statement must be consistent with previous year(s) earnings,

AND

·         Business tax returns for the most recent tax year, including K-1's for S corporations and partnerships,

AND/OR

·         Corporate tax returns for the most recent tax year, including W-2's for the most recent year for corporations.

Business tax returns must be obtained even when the self-employed income is not being used for qualifying purposes in order to determine if there is a business loss and that it will not have an impact on the stable monthly income used for qualifying.

Note: The federal income tax return must reflect at least 12 months of self-employed income

Difficult For Self-Employed to Qualify For a Mortgage?

January 4, 1999  The Mortgage Professor, www.mtgprofessor.com

"I am self-employed and want to purchase a house. I can't believe that the system doesn't work for people like me."

It does work for people like you, but it is somewhat more complicated and onerous. But there are plenty of others out there that will welcome your business.

Interestingly enough, I have been in at least 6 less-developed countries where it was impossible (as opposed to "more complicated and onerous") for a self-employed person to obtain a mortgage loan from an institutional lender. Their only sources of funding, other than family members, are money-lenders, who charge extortionate rates and break their legs if they don't pay.

A major problem with lending to the self-employed is documenting an applicant's income to the lender's satisfaction. Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information by contacting the employer. With self-employed applicants, there are no third parties to verify such information.

Consequently, lenders fall back on income tax returns, which they typically require for 2 years. They feel safe in relying on income tax data because any errors will be in the direction of understating rather than overstating income. Of course, they don't necessarily feel safe that the W-2s given them are authentic rather than concocted for the purpose of defrauding them, so they will require that the applicant authorize them to obtain copies directly from the IRS.

The support it provides to self-employed loan applicants is an unappreciated benefit of our income tax system. It may not be fully appreciated, of course, by applicants who have understated their income. In countries where virtually no one pays income taxes because cheating is endemic, tax returns are useless for qualifying borrowers.

The second problem with lending to the self-employed is determining the stability of reported income. For this purpose, the lender wants to see an income statement for the period since the last tax return, and in some cases a current balance sheet for the business.

The two government-sponsored enterprises, Fannie Mae and Freddie Mac, who purchase enormous numbers of home loans in the secondary market, have developed detailed guidelines for qualifying self-employed borrowers. Lenders looking to sell such loans to the agencies must follow the guidelines. The problem is that implementation can be complicated and time-consuming, especially when the declared income comes from a corporation or a partnership. (If you own 25% or more, you are considered as "self-employed").