Monthly Archives: November 2013

Just When You Thought It Was Safe

The beginning of the mortgage meltdown began over six years ago. The regulatory changes have continued as the federal government tries to make sure that there are better controls and oversight in place that help to avoid a repeat. In January 2014 a new set of rules that define a qualified mortgage will go into effect.

Conventional mortgages will be classified into three categories. There is the qualified mortgage, the temporary qualified mortgage and the ability to repay mortgage.

The qualified mortgage will be the cream-puffs. These are the loans with a debt to income ratio of 43% or less. This is not the largest class of mortgages that most companies process.

The second category, or the temporary qualified mortgage, is where the greater number of loans in the market come from. This category includes all loans that receive approve/eligible underwriting findings through either Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Processor. The maximum debt to income will likely not exceed 45% when the loan to values are at the maximum allowable level. It is important to note that Fannie and Freddie continue to modify and tighten guidelines. The overall evaluation of the combined risk factors that generate “approve/eligible” findings have become a moving target. If you currently have a transaction that is in process it is important that it be through the underwriting process prior to January 10th and ready for closing. If it is not, a transaction in process with approve/eligible findings might not continue to be approvable after that date. New construction transactions are especially vulnerable.

The final category is the ability to repay. These are loans that in the past have received “ineligible” findings that might have been able to proceed through a comprehensive underwriting and evaluation of combined risk. As of this date, no investors have stepped forward to purchase loans in this class. Until this happens, these loans will not move forward after January 10, 2014. There is hope in the industry that in time, investors will enter the market to fill an important gap and need. The cost for these loans (interest rate offered to the consumer) will likely be higher, if and when a market appears.

Federal agencies such as FHA and the USDA have the right under Dodd/Frank to create their own version of the qualified mortgage. It is likely that most of the mortgages that move forward will fall into the temporary qualified mortgage category. It is likely that the maximum debt to income (DTI) will not exceed 45% for these mortgages. Much of the market that, up until now, has exceeded a 45% DTI and has been less than a 50% DTI will no longer exist.

There is still much unknown. Investors are uneasy about interpretations of the qualified and temporary qualified mortgage categories. It makes it very difficult to be able to provide guidance to the parties to a transaction. There does need to be an awareness of the changes and communication will be imperative.

There will also be a 3% cap on fees that the buyer is charged that goes into effect in January 2014. The 3% applies to any fees that go back to the lender as income. It is important to understand what comprises the 3% and what does not. There are many situations that are currently in application that will no longer conform.

It will be interesting to see how these new rules affect who gets a mortgage and who does not. Lenders are required to demonstrate that they do not discriminate against protected classes when they make lending decisions. It may only be a matter of time before these more restrictive lending rules clash with the intent of Equal Housing regulations and laws. An unintended storm may be brewing on the horizon.

Are You Tax Prepared?

It’s hard to believe that it is almost time to start thinking about gathering all of the receipts and supportive information required to complete Federal tax returns again. If there is a housing decision in your immediate future make sure you carefully plan in advance of preparation.

Income is a major factor when a mortgage company qualifies you to purchase a home. First, I want to make it very clear that the IRS states that any income received in a calendar year is to be reported. However, anyone reading this knows that there is a lot of money that exchanges hands that never gets properly reported. The importance in this discussion, is that if you don’t report the income, do not expect to be able to include it as qualifying income. Understand the “two edged sword” consequence of your decision.

Self-employed buyers that are sole proprietors typically complete a Schedule C that reflects revenues and expenses. In an attempt to reduce taxable income, it is not unusual that many self-employed individuals write off as much expense as possible. Revenues of $50,000, become net income of $15,000. The mortgage company will only be able to use the net income of $15,000 in this example and only be able to add back depreciation expense if there is any. It is with frequency that a self-employed client will tell me that he made $50,000 in the above example.

If you are self-employed, learn to understand the difference between revenue and income and plan appropriately. You are going to pay more to the IRS but will be in a better position to buy a home if you are careful about reducing revenue too much!

Self-employed buyers are not the only ones that need to give careful consideration to what income they intend to report to the IRS. If you are in a profession that involves significant tip income, how much you declare is something for you to give careful consideration to. Waiters, bartenders, and beauticians receive regular tip income. If you want it to be considered as income, this becomes part of a two year plan as a two year average of this income is calculated for qualifying purposes.

If you itemize and complete a Schedule A, understand that unreimbursed business expenses can reduce your taxable and qualifying income. If the total of unreimbursed business expenses exceed 2% of your adjusted gross income, the amount in excess of 2% reduces taxable income with certain limitations depending on the amount of your income. Sales professionals frequently complete a Schedule 2106 (unreimbursed expenses). If you reduce your income watch out for the “two edged sword” effect.

One of my biggest pet peeves, is the individual that provides the tax preparer with a list, or a box of receipts of unreimbursed expenses that DO NOT EXCEED 2% of adjusted income. Most preparers reflect the total anyway on the Schedule A without understanding that the amount that is reflected, providing you no tax relief, has just reduced your income for mortgage qualifying purposes! Let’s make this clearer. If you earn $70,000 annually (let’s assume that amount is also your line 38 adjusted gross) and your unreimbursed expenses total $1,375.00, you receive no deduction. HOWEVER, your friendly mortgage underwriter is going to reduce your annual income that year by $1,375.00. Sound innocent? Not enough to make a difference? There are many cases where an additional $114.58 monthly might affect an investor’s decision. Make sure you tell your tax preparer, if there is no benefit from the calculation, remove it from the Schedule A.

This just scratches the surface of planning for tax preparation. If any of this is confusing, e-mail me at hgordon@monarchmtg.com.

The Cart Before the Horse

It’s opening night for a Broadway show and you have the lead role. It’s the opportunity of a lifetime. But wait…..you’ve never been to a rehearsal. How will you perform? Perhaps it’s the end of the semester and time to take final exams. The results will determine whether or not you will be accepted into Law School…….but you never attended class and didn’t read the assigned materials. Here is even a scarier scenario. You’re about to go out to buy a home, but you have not taken any steps to find out anything about what you are getting yourself into. As ridiculous as it sounds, this is how the largest percentage of potential home buyers enter the market.

There is much to learn prior to entering the market. Primarily, prospective buyers need to understand what their buying power will be. Most real estate agents won’t begin to show property to a candidate prior to a pre-qualification being completed. To be in the best position to negotiate the best deal, buyers should call a lender as step one.

There are many elements that affect credit scores. Disputes, past payment tribulations, and reporting errors are just a few of the items that can affect a credit score, influence the type of loan programs offered, and possibly even the cost of credit extended. With enough advance time, some of these issues can be modified or eliminated. Available loan programs and pricing can potentially improve. There are many misconceptions and misunderstandings about credit. Buyers need to educate themselves.

Income is another critical area that needs to be evaluated. The self employed, hourly employees, and asset based income, may need documentation, analysis, and verification prior to a determination of available, qualifying income being made. Many sole proprietors do not understand the difference between revenue and income. Income affects qualifying ratios, thereby being a critical element in determining loan programs and potentially, the cost of credit.

How much money do you need  to buy a home? What do you have available? Do your bank statements show deposits that are not payroll related that may need to be documented? Has a family member recently given you money that may need to be documented as a gift?

Do you own a home? Will you be selling it? What are your options if the house doesn’t sell? Is renting a possibility? Do you have military service that you didn’t think to disclose?

These are some of the most important issues that need to be explored. Each buyer has an individual story that is unique. If you don’t do your homework to check out how your background affects your ability to buy, you may be in for unnecessary disappointment.

Too many of the federal regulations that exist in lending today are the result of buyers that presumably weren’t informed properly or misled before they went to settlement. Is it possible that some of the meltdown could have been avoided had buyers educated themselves prior to buying? 

If you wouldn’t get married without dating and finding out more about your spouse-to-be before you take that leap, why would you purchase a home without doing the same due diligence?

 

 

 

 

Finding “The One”

Buyers look through listings online or those provided by realtors like they look through personal ads, looking for “The One”. The one that will look good when you arrive to meet it. The one that dear old mom or dad will like the most. The one that you have lived your entire life to find. The one that makes you feel like all of the planets in the solar system have aligned.

The chances of finding the exact right home from a listing picture, is about as good as finding the right person to settle down with when looking at a picture on a date.com service. How often do people search endlessly, pick a few to check out, make the wrong decision, end up changing their mind when their needs aren’t fully met, resulting in an unhappy split? Oh, and I’m referring to their home buying decision.

There are all kinds of stories about women dating men (and vice versa) that are not perfect for them, with hopes of changing them. Unfortunately, the end of the story is that most of the time those efforts fail. Most homebuyers however, never understand that they might have overlooked their chance to find their McDreamy and McSteamy house, all rolled into one wonderful home. (Guaranteed mom and dad will approve). It might not be exactly what they are looking for as is, but the chance to make it perfect, is within their grasp.

One of the most popular loan programs available for purchasing and renovating any home is FHA’s 203K renovation loan. Notice I have emphasized “any”. The program has been promoted primarily as a renovation loan for people that want to fix-up the homes they live in. It also has had a lot of recent attention as a tool to purchase and fix the problems associated with foreclosed homes. Truth-be-known, if you can find a home in the desired location, you can turn it into exactly what you want. (a whole lot easier than changing the person you might be buying it with)

There are two types of FHA 203K loans. The first is a streamline edition. The streamline loan lets you make minor modifications up to $35,000. You cannot make structural changes, it’s designed for cosmetic alterations. You don’t have quite as much of a process with the streamline and it usually is faster to process. 

The consultant 203K is for the home in need of more extensive changes. Keep in mind, that the program allows for major re-construction. As long as certain structural elements of the existing home are left intact, changes are only limited by local building restrictions, FHA loan limitations, your individual borrowing capacity, or your imagination. Of course there are numerous factors to consider and you should find an expert to discuss the 203K loan program with.

If you’re willing to open your eyes, you may find that the homes you found to be undesirable, suddenly are exactly what you have been looking for. I can’t help you turn the person you are purchasing with into a perfect match, but I can help you to discover that the perfect home has been right in front of your eyes all along!

Call me at 301 788-8700, e-mail me at hgordon@monarchmtg.com, or visit my website at http://www.monarchmtg.com/hgordon to contact me or to arrange a time where we can discuss whether the FHA 203K loan is right for you.