THE SELF EMPLOYED BORROWER

                                                      www.texarkanagazette.com
 I hesitate to say it is more difficult to obtain financing for self employed individuals but unfortunately that can be the case.  Not every self employed borrower is difficult-but there are a host of different rules and criteria that have to be met for the self employed person to be successful in their quest of a mortgage.

   The first hurdle that has to be cleared is the self employed business owner must have filed tax returns on the business for two years.  (There is an exception with one of our lenders that allows for one year if the borrower has a previous employment history in the business he now owns-but solid net profit has to be demonstrated in that one year in order to qualify.)

  The second item on the list is the answer to this question: What was the average net profit over the past two years?  This is important as many accountants instruct their clients to take as many expenses against the business as possible.  That may make perfect sense tax wise, but that practice can make a mortgage loan  impossible. For mortgage purposes what has to be computed is the net profit-sales, less all
expenses plus depreciation added back in and averaged over a two year period.

  If for instance over the past two years a business has shown a loss-the owner will not be eligible for a mortgage based on his business income. Cash flow and sales are irrelevant-it's the bottom line that matters. So if you are thinking of getting a mortgage and you have shown losses for the past two years, you will need to get with your accountant and structure your tax returns to show enough profit to cover your consumer debt and a house payment for the next two years. Obviously, purchasing a home when one owns their own business requires planning.

  But let's say the borrower, though self employed has a spouse who is a W2 employee and makes a good living. That's great-but if both parties file taxes together, the W2'd spouse has to have enough income to deduct the losses of the self employed husband or wife and still have enough income to qualify for the mortgage.

  What if you decided to move from being a partnership to an LLC or S-Corportation? The new W2 income can be accepted, but if you are paying yourself bonuses or dividends again, they can't be counted without a two year history. In addition if the business returns show losses, then those loses have to be deducted from the W2 income.

  Let's assume that the owner has been in business for two years or more and is showing enough profit to contemplate purchasing a home.  Are the owner's bank accounts separated from his/her personal accounts? What about credit cards? Are the credit cards associated with the business paid out of a business bank account?  Vehicles as well? My advice is keep business bank accounts, credit cards, and vehicles separated from all personal accounts.  Otherwise you must put the business expense into personal expense which could run the debt ratio so high that mortgage financing is no longer possible.

  It is also important to keep in mind that while money from a business account can be used in mortgage transaction, often you will need the services of your accountant to verify that using the money will cause no harm to the business. In addition, after the first quarter of a year you will be required to prepare a profit and loss statement for your mortgage lender so the underwriter can get a feel for how the business is doing year to date, and some loans require audited profit and loss statements which can run into significant money to prepare.

                                                                    www.sweetpeachblog.com

  I have done many loans for self employed borrowers-but the rules are not the same. More preparation is involved and that is good to know before you have your heart set on buying a particular home.

TAKING CARE OF THE CLIENT

                                                           www.inc.com

  The cost of acquiring a new  client or customer is five times that of retaining a current customer.  There is no doubt that is the case.  But if so, why do so many companies chase after the one they don't have and disregard the ones they do?   More than coupons, discounts, and bonus points, what floats my boat is that when I have a problem, I can find someone to help me solve it. With companies going to more and more automation, (which means fewer worker bees)the simple act of calling customer service is almost guaranteed to become an exercise in frustration.  To that point, voice recognition software has become sensitive enough that a raised voice or cursing can get you to a human being who may or may not have the authority to help you. (This I know having experienced it myself.)

  One of the key components to a successful mortgage transaction is customer service.  Anyone can sell competitive terms and rates.  What is important is the follow through. Can Lender XYZ deliver on what they promise-or over promise as the case may be?  I find this especially common when the borrower is shopping on the internet.  As a rule I don't compete with internet lending. The old expression "what sounds too good to be true, is too good to be true" rules in this circumstance.  Often with internet lending the client and or their real estate agent can't speak with the same person twice, are not kept apprised of the progress of the loan and find little or no accountability when things go wrong. Of course there are exceptions but these types of problems are not limited to internet lending alone. I have heard many complaints from real estate agents and borrowers alike that the lender that is handling the mortgage loan disappears into a black hole while the transaction is in process. 

  Buying a home is an emotional process.  Not only are there are the logistics of orchestrating the move to deal with, but some moves are not predicated on happy experiences-perhaps a death or divorce is the motivating factor. In addition, there is a seller who needs to know the progression of things as well, so they can plan their exit from the home that is being purchased. Communication to all parties involved in the transaction is critical. This is a basic-it needs to be done.

  Post closing, our customers may not have the same issues as someone who buys a computer or toaster that doesn't work, but post closing concerns do occur.  It is important that our clients know there is someone they can call to assist them with any problems or questions that come up. While we don't service the loans we originate we can still get in touch with our network of lenders to find answers to question or at least a contact that can be called to solve a problem.

  Our company likes to use the motto "We want to be your lender for life."  We try to act on that by informing our past clients of financial opportunities such as interest rate reductions. shorter loan terms etc. as the years go by to improve their financial situation.  We also try to share information about other companies that we trust that might facilitate the financial betterment of our clients. such as tax preparation, insurance companies, or financial planners.  A large percentage of our business comes from past clients, be it refinance transactions, referrals or trade up situations.  I am always happy to see an old friend. To be referred a new borrower from a past borrower means that we have done something right.  I believe that is the highest form of compliment that I can be paid on my past work. 

  I also like to co-opt a slogan that was used by a department store retailer that I worked for many years ago and that motto was "Think Like A Customer."  It is very easy once one has been swallowed up into a business to forget that most people don't know the particulars of the business and don't have the basis of knowledge that I do about what I do. Everyday I try to keep my eye on the fact that I possess knowledge that I have learned over many years in the real estate industry.  This means I have to take the time to stop and explain what is going to happen. Even if I have bad news to impart-the truth is better than a soft shoe around it. Once the truth of the situation is acknowledged, then all concerned can move to deal with it. 

  It is important that whoever you choose to handle your mortgage business is someone that you trust to tell you the truth, follow up, return phone calls, and keep you in the loop of your transaction.  To get less than this on the most important financial transaction you will probably ever conduct is not acceptable.  

WHO NEEDS ASSETS WHEN BUYING A HOUSE?

  You do. 

 There seems to be confusion on either end of the spectrum of the role of assets in a mortgage loan transaction.  Many people I talk to think they need no money to buy a home because they are receiving 100% financing through USDA or VA-two programs that do not require a down payment.  And then there are the folks that still believe that one has to have 20% to put down in order to buy a home.  I have been working in the housing industry since 1991, and even in that long ago era, one didn't need 20% down in order to obtain mortgage financing.  In 1983 I purchased my first home and I put 5% down-so the 20% requirement is long gone, but apparently not forgotten.

  The fact is that you do have to have some money in order to purchase a home.  Minimally, if you are using a 100% financing program, you would need $800-$1000 to cover inspections, earnest money, and the appraisal once your loan was submitted.  However, while it is not my decision to make I highly encourage savings.  For one thing the underwriting goes much more easily if a borrower shows that they have the ability to save some money.  This money can be in retirement funds, CD's, a bank account, stocks, etc.  Even a couple thousand dollars in the bank shows a lender that the borrower is able to manage their finances.

  I have closed many loans for folks that only have a little money in their checking account.  That's okay-government loans don't require the borrower to maintain reserve funds.  However, if the simple aspect of purchasing the home requires all the money the buyer has, what happens three or four months down the road if the furnace quits running, the roof leaks, or there is an electrical problem?  Yes, there are whole house inspections and the inspectors do try to find anything that might go wrong in the near future so that it can be repaired prior to closing the transaction.  However, whole house inspections while useful, don't always find everything.  The whole house inspector may not be able to determine if the sewer is going to back up if it never has before. There are always unforeseen circumstances when it comes to owning a home. I put $1000 into treating two trees this summer because of the emerald ash borer threat. Stuff comes up. Not to mention the normal issues of life-medical emergencies, car issues, or school participation fees that can be a bit pricey.

  My advice to soon to be home owner hopefuls is to save a little money.  If you have a tax return check coming-don't let the nearest car lot call your name and sweet talk you into using the money for a down payment on a car. Tuck it away-it may come in handy once you are a home owner.  If you don't have a retirement plan at work-create one.  If your company doesn't offer profit sharing or a 401K do it yourself.  Ask for a referral for a good financial planner and put a little away each month.

  I look at an awful lot of bank statements that are a testament to the fact that Americans eat out-a lot.  I often see that people spend $300-$500 a month on eating out. That's okay if you like to eat out-but put one meal a month away for a rainy day.  And if you find that eating at home isn't so bad-put more than one meal a month away.  It adds up in the long run.

  We all will not be blessed with winning the lottery, inheriting a large amount of money, or stumbling over a pot of gold at the end of the rainbow, but we can all do what we can do.  You will make your loan application that much stronger and create a little less stress for yourself in the process.

YES, WE ARE TALKING ABOUT CREDIT...AGAIN!

  Here's what happens.  Somebody drives by a home that they always admired-even thought they might like to live in one day.  There is a "For Sale" sign in the yard.  That wistful thought becomes an action plan-BUY THE HOUSE.  The first thing the potential buyer does is to call the Realtor listed on the sign.  The Realtor asks-"Are you pre-approved?" That's when my phone rings.  The facts are that this is the backward way of achieving the goal of home ownership-pre-approval comes first because -if you are a regular reader of my blog you already know-that a buyer not only has to be ready and willing, they have to be able to buy the home. Responsible real estate agents will not write an offer on a home until and unless the buyer has spoken to a financial institution about the prospects of borrowing money to buy the home.

 Once the phone call comes in I begin the process of pre-approving the borrower-the first step of which is to take a look at credit to see how the potential home owner manages his/her debts.  The statistic cited above by NCO-1 out of 4 people in the US have a credit score of 599 or below?   That is a very sobering number. 25% of the adult population of the United States has issues on their credit report that drop their scores below what most lenders require to obtain mortgage financing.  And I would attest to the fact that the 25% number is verified in the credit reports I see.  The reasons are many-medical hardship, job loss, mistakes on the credit report, or just plain old bad financial habits enter into a low credit score. (If I had my druthers a household finance class would be a required part of every high school curriculum in the United States-but no one is polling me on the subject.  In any event, many, many borrowers for one reason or another are not able to qualify for a mortgage. Here they are-the home they have always wanted is available and they don't have the credit to buy it- and what's more the lack of ability credit-wise is a surprise. Or maybe they knew all along and thought that given some time, the ship would right itself and all would be fine.

  With regard to credit there is no magic.  Bad credit doesn't disappear-it remains on a credit report for years and years.  If there are tax liens, collections, late payments, judgements, repossessions-all that bad stuff that most people would just like to go away-it's going to be with you for a very long time.  Unless, that is, you do something about it.

  I can't begin to enumerate the number of times I have sat down with a potential home buyer to go through their derogatory credit to have them say, "But I paid that one.  I disputed that.  That's a mistake."

  The Fair Credit Reporting Act is supposed to protect your rights with creditors.  In order to do that it has to be enforced.  At the current time it is not being enforced without expensive legal action. It is a fact that trying to take care of this yourself is in my opinion, fairly hopeless.  If there is one judgement let's say, that is showing unpaid, you can resolve that yourself relatively easily.  But dealing with collection companies? Forget about it. Even if you have paid that collection multiple times it may still show on your credit report as unpaid.

                                                                         firsttuesdayjournal.com

 Even the President of the United States can't unravel the secret to fixing credit. 

  I have an idea.  You knew I would, didn't you, and furthermore it works.  You can file an expensive law suit to correct your credit or you can work with a company that specializes in cleaning up your credit report. The Fair Credit Reporting Act requires that creditors go through a fairly extensive process in order to place a delinquent account on your credit report.  Because of the complexity of the process, many creditors bypass the required steps. The success of the company working on your behalf comes from challenging the creditors to produce the proof that allowed them to place the negative items on your credit report.  The end result of this is that items that have been placed in error or that have been paid or resolved are cleaned up and reported correctly, thereby improving your overall credit standing.  Challenging these companies yourself, working with the bureaus to clean it up yourself has become almost impossible for the individual.  The cards are stacked against you.  The link below is a 60 minutes piece that was shown earlier this year.  If you are thinking you might want to take on the task-please do yourself a huge favor and watch this:


http://www.cbsnews.com/videos/40-million-mistakes-is-your-credit-report-accurate/

 My final thought for the day is that you DO need to be careful of the company that is working on your credit. There are some outfits that are only too happy to take your money and not do much.  I am always willing to recommend the company that we use in our business as they have a track record of success with our clients.  So a referral from your lender or real estate agent is always appropriate. Credit clean up can take anywhere from 45 days to 9 or 12 months depending on the issues.  Do yourself a favor-plan your housing purchase in advance.  If you think you have credit issues, get ahead of them and go in for a pre-approval six months prior to when you think you wish to move forward purchase. If you need a credit intervention-do it prior to finding your dream home.

APPRAISAL? INSPECTION? THERE'S A DIFFERENCE?

                                                                   www.neiu.edu

 We are speaking of two different subjects today-Appraisals which are one thing and inspections which are another.  Many of my first time buyers are confused about the difference.  The appraisal is an inspection to be sure-but it is very different from other types of inspections.

  What the appraisal is all about is value. The reason for the appraisal is for a licensed appraiser to place a value on the home you are buying by evaluating the market in which the home is located.  In other words, to compare and contrast the home to others in the neighborhood that have sold recently to be sure that the sale price is within the scope of what is happening value wise with similar properties.  While an appraisal does in fact protect the buyer from paying too much for a house, the real beneficiary of the appraisal is the lender who does not want to be caught holding the bag on an overpriced property.

  Other types of inspections are done in order to obtain condition information about the property for the benefit of the buyer and in the case of some specific inspections on government loans, the lender. Various types of condition inspections are whole house-which covers the basics of structure and mechanicals, termite and wood devouring insect inspections, well, septic and radon tests to name a few.  Sometimes the whole house inspection may uncover an issue which requires further inspection by a specialist such as roof conditions or furnace and structural problems.  While many people are not crazy about shelling out the cost of a whole house inspection (in our area $300-$400) this cost is minimal when considering that a situation that even the seller doesn't know about may be uncovered-such as termites that have invaded the studs of a portion of the home or a floating foundation-which will cost thousands of dollars to repair.  Remember-once you own a home, you own any issues associated with it as well. There is no landlord to call. All repair costs will be coming out of your pocket.

  It is important to note that even though whole house inspections may identify problems, a whole house inspection is not a guarantee that every issue will be uncovered.  Whole house inspectors are generalists.  If there is an issue that concerns a buyer it is to that person's benefit to have someone who is a specialist in the concern further investigate the issue.

  Appraisers are required to note certain conditions of they see something that they feel needs to be looked at.  However, appraisers are not contractors and do not possess the knowledge to be able to identify situations that are not obvious.  They can look at a circuit breaker box for instance, and determine that the panel is wired for 100 amp service-but an appraiser would not have the knowledge to know if that box was wired correctly. So it is important for the buyer to know that they cannot depend on the appraiser to identify any significant condition issue. They might, but then again they might not.

  When asked I always recommend that a borrower obtain a whole house inspection-even if the property is new.  It is one more set of eyes to be sure that you are buying a property that will not need an infusion of money in the near future to keep it habitable. If for example the furnace is older but working  the seller has no responsibility to replace it on the reasonable premise that it might fail in the next year or two. All the seller can be responsible for is the condition of the property when they sell it. In order to hedge some bets if there is a concern about some of the appliances or mechanical features of the home there are home warranties available for sale.  Often the seller will pay for a one year warranty for the buyer as further protection as a part of the purchase agreement. Buyers are also able to purchase a warranty themselves if they feel it would be beneficial.