Today's topic is geared towards those who will either be first time home buyers or those who have not been through the mortgage process for a few years - say pre 2010.
When most folks think about buying a house they think of a pleasant experience, the fulfillment of a dream, the procuring of the nest. Home has so many powerful emotional connotations. I have seldom worked with a buyer that wasn't excited about the prospect of buying a home. Many buyers come to me with ideas of how they would like to structure their financing and some very creative plans about how to do it. Maybe they read a book, or spoke with someone who bought creatively back in the day. So for those folks-let's take a moment to review.
In 2008 the bottom fell out of the real estate bubble due to over inflated housing prices and some lending practices that were sketchy at best, illegal at worst. By 2010 the federal government had caught up with the issues and instituted corrections that probably went overboard in terms of how to fix the situation. Many of the fixes are beginning to come under scrutiny as they have kept the housing market in slow motion as qualifying restrictions have been so ...well...restrictive that they have choked off business. We have seen some dialing back of lending regulations but there are enough left in place to warm the cockles of any auditor's heart, and frustrate even the most patient borrower.
marketdrive.com
Compliance Alert ahead-these are things that no longer can be done if you are going to purchase a home using a mortgage.
1) I have my down payment in loose change that I have been saving for ten years. I want to run it through the change machine at the bank and use it for my down payment.
This actually happened on one loan we did a few years ago, but the issue is not the amounts of change, the issue is large cash deposits to your bank account. Un-sourced money can't be used in a real estate transaction. By sourced, I mean the money used in the purchase has to come from a documented source-a paycheck, and IRS check, a check for the sale of your motorcycle (accompanied by a bill of sale and title transfer). In other words we as the lender have to be able to see where it came from, not under the mattress (Yes we may be able to see it there, lying between the memory foam and the box springs but we can't see where it actually originated . This is often the most troublesome area to document. You may have garage sale proceeds, the money your cousin Ernie owed you to buy new tires for his car, or whatever. I look at my own bank account and it probably wouldn't withstand much scrutiny. When we buy a home we have to use our bank account differently. If you plan ahead the lender will only require two months bank statements so put your mattress money in the bank several bank statements before you plan to use it.
2) You want to buy a house with a big hole in the roof and the kitchen has been gutted. You have pretty good contracting skills so you will just fix it after the loan is closed.
Unfortunately you will not be able to borrow money for a home that has serious repairs that need to be made with the idea that you will make the repairs as you can. Lending got caught on that one. It seems there were people out there that closed their loans and never made the repairs (Who would ever have guessed???). Along the same lines, there used to be a practice of lending more money than the asking price for the home so that repairs could be made. That too has undergone some serious changes. Once again people just were not making the repairs and using the money for other things. Anyone up for a trip to the Bahamas? Along comes the lending crisis and banks found out they owned a bunch of homes that had never been repaired. There are a couple of rehabilitation loans out there funded by FHA, but those are highly regulated and not open for freestyle repair jobs.
3) you just bought a beautiful wooded lot a couple of months ago. You signed a contract with a builder and you are going to use the lot as your down payment.
It is a Fannie Mae and Freddie Mac requirement that you own the lot for 12 months before you can use it as equity for the down payment. Along the same lines it is very difficult to obtain financing for a self build. So all of you would- be contractors will have to find funding other than from any type of source that uses money that is overseen in any way by the federal government. There may be some small banks that will do in house lending that may still do some of this for outstanding clients.
4) You are self employed and make a really good living. But, here's the thing, you really think taxes are too high so you expense everything out so you show a loss on your taxes. But you have great credit and you can put 20% down.
Back in the bad old days there used to be a great loan for self employed people. It was called the "stated income" loan, more often fondly referred to as the liars loan. The borrower would "state" their income - a number that would ensure loan approval as since it was "stated" it could be goosed up to cover any debt ratio issues that might occur. That loan has been pretty much decreed illegal. So-if you are expensing away your income on your tax returns, you need to start showing some net profit. Enough net profit to cover your debt ratios. Two year's worth of net profit is what is required. It would be helpful if some accountants would take note of this so you can counsel your self employed clients- a simple question-do you plan on needing a loan in the future, would do the job. This is a two year plan. And I would think any significant consumer credit loan would need the same preparation.
5) you can't sell your current home for what you would like to get for it. You will just keep it and the rent you receive will offset the new house payment.
The only way you can do that is if you make enough money to cover both house payments and your debt ratio is in line with both payments. The rules on this one are that you must have two years of rental history filed on your taxes any specific property to use the rent money to offset rent in the debt ratio. If your current loan is an FHA loan you must also have a 25% equity position as well. The same applies if you have sold your existing home on a contract sale. Two years showing the payments on your tax returns. That's the rule.
6) you currently have an FHA loan. You don't plan to sell your current home but your mortgage loan originator tells you that another FHA loan is the best way to go.
FHA only allows you to have one FHA loan at a time. UNLESS: and this is getting harder and harder to get an exception for - you can demonstrate a significant increase in family size so the original home doesn't suit any more, or in the case of a job transfer you can't commute to the new job. It used to be that Indianapolis was far enough away from Lafayette that the exception could be approved. The last one of those I tried was a definite thumbs down.
7) Your credit is too low for financing a mortgage loan. But your girlfriend has great credit so it would be okay to make her the co-borrower wouldn't it?
No- the whole co-borrower thing doesn't work anymore. Lending takes the lowest middle credit score so your girlfriend's credit does nothing to help the cause. She may be able to buy a house if she chooses and let you live there.
Gee this whole exercise has been a bit negative hasn't it. I will follow it up in my next blog with all the yes answers! There are more than you think left.
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