As the interest rates have remained historically low for nearly a month, we have seen an increase in loan applications nationwide. Sales of new homes and existing homes are lower than they were before the home buyer tax credit ended, but according to NAR overall sales are higher than they were a year ago. And certainly with rates at historic lows, many borrowers who were on the fence about refinancing have decided to make a commitment to get the lower mortgage rate now. So why are those borrowers having so many problems?
I heard someone on television commenting that although rates are amazingly low, the banks are being very "stingy" about loaning money and for that reason it is hard to get financing. So, on this Friday afternoon, I thought that this issue of stinginess among lenders is a good one to finish the week with.
First, just a note. Banks make money by loaning money. Lenders do not get paid if they don't lend. We have adopted a mindset that the banker is an Ebenezer Scrooge type hoarding gold in a freezing cold counting house while his poor, shivering clerk tries to stay warm in the corner while dreaming of Christmas. In reality, banks like to loan money. Mortgage companies like to loan money. But they don't like to loan money if they incur financial consequences and/or penalties for doing so, and a common penalty, certainly among smaller lenders, is the very real possibility of having to buy back an improperly processed loan. Having to repurchase a closed mortgage loan that has been sold because the loan was deemed irregular is expensive and can be very detrimental to a company's bottom line, so lenders are going to try to avoid being put in that position as much as possible. One underwriter I spoke with today told me, "With Fannie and Freddie auditors being so strict, they look at a loan and say, 'We don't like this property, so we are rejecting this loan or we don't agree with the income, so we are rejecting the loan.'" So, of course, the underwriter is more careful to avoid being put in that position.
I thought today I would take time to address all of the underwriting problems that have come up this past few weeks in an effort to shed some light on how files are underwritten today.
1. Problem: Rental income from a family member cannot be used to qualify for the new mortgage. I have a borrower who was buying a home to rent to their daughter. The borrower has excellent credit--the mid scores for the primary borrower were over 800, and he has two years experience as a landlord. However, he is self-employed and does not file a lot of income on his tax returns. On an investment property this has not traditionally been a problem, because the projected rent as demonstrated by a form 1007, which is part of the appraisal, allows us to use the rental income to offset the payment. The fact that he had a tenant picked out who is his daughter should be good, because then he did not have to look for a tenant. Right? Actually that's wrong. It turns out that lenders do not allow rental income to offset the payment if the house is being rented to a family member. The lender considers it the same as a kiddie condo, and they require that the parent qualify with the full payment. I could not find this spelled out anywhere as a published lending guideline, and I was told by one underwriter that it is not a Fannie or Freddie guideline, but it is a rule that everyone follows nevertheless.
Solution:
Rent the house to somebody else, and change lenders if necessary. Some lenders will not allow a new letter of intent even with a rent check and purchase agreement, so you may have to find a new lender.
Problem: The loan is not closing because the income tax transcript is not back from the IRS yet for one or both years. Lenders have been actually using the 4506T forms prior to closing on self-employed borrowers for several years, and last year they started requesting the transcripts on W2d borrowers. In January we had a borrower who had just established residency here in the United States and had filed his 2008 tax returns the previous year. Since we needed two years of returns to qualify, he filed his 2009 tax returns and took the returns directly to our local IRS field office and had them stamped "Received" into the office. In the past, having the returns stamped "Received" by the IRS office worked in lieu of having the transcript. But not any more. The lender had to have the processed transcript back, so the purchase transaction could not close until the end of April, after the IRS processed the return and sent us the transcript.
The solution: Wait for the transcript. The new financial reform bill mandates that lenders receive a processed transcript from the IRS. During tax season, which usually is January through April 15, the IRS is receiving millions of tax returns. This year, the wait to get a transcript on a 2009 filing was up to six weeks after the end of tax season. For those who have not filed an extension but have presented their 2009 tax return to qualify, the lender must have processed transcript back verifying the income on the return. So be patient and wait. A lot of originators use a verification service to verify the returns that we are presenting, and in the past, lenders have been able to use our processed transcript, but the new trend is for the lender to pull their own copy of a transcript. Ours is just really for internal quality control purposes. Remember, too, that the IRS is already short-staffed and now that they have a legal obligation to provide a transcript for every borrower on every file, the time frame for transcript delivery is probably going to increase. So be patient.
But you may say, the borrower has been salaried on their job for 10 years and the originator just asked for a W2 and a paystub. Why do you need the tax transcript at all? Because, new guidelines demand that lenders look at the overall financial picture as reported on a tax return. For instance, if you are salaried but your spouse is self-employed with losses on the tax return, the lender will subtract those losses from your income and require that you qualify on the remaining income even if your husband or wife is not on the loan.
Problem: I (or my friend or borrower) have a credit score below 660, so I am being asked to put 25% down. Anything over a 620 used to be considered A paper. Now 620-659 is B paper, and anything under 620 is C paper. Right now FHA is in a comment period for changing its own guidelines to require that loans below 580 put 10% down. In reality, most lenders won't do loans under a 620 credit score right now because it is too hard to get them approved. But FHA is really the last bastion for the lower credit score borrower. For a conventional borrower, even on a rate and term refinance, the difference between a 660 and a 654 can mean the difference between getting your mortgage refinanced at 80% of the value or not being able to refinance at all because the loan amount is cut down below what you actually owe on the mortgage.
The solution: Credit scores matter more than ever before. And while in these difficult times it can be very hard to keep your credit good, it is really important to try. Even 1 point can make a huge difference in interest rate and terms if you are just below a major threshold score. So, if possible, pay those bills on time!
Problem: My borrower is self-employed. He made substantially more money this year from the sale of goods (capital gains) than last year. I added together his capital gains from 2009 and from 2008 and divided them by 24 months. The underwriter declined the loan. (This happened to me this morning!)
The above scenario did not used to be a problem at all. The rule on capital gains, or dividends, or any of these types of incomes was that it had to be reported for two years and averaged if the income were greater in the most recent tax year. If the capital gains income were lower in the most recent tax year, the underwriter might not allow it, or might just allow the 12 month average of the lower income. But in a situation of increasing income, the underwriter was usually happy. Not any more. Even though the capital gains income was on the return for two years, was part of an ongoing business that we know is continuing in 2010, and the amount was larger in 2009 than in 2010, this underwriter did not use it.
The solution: A different set of eyes will often look at situations like this differently. Fortunately for me, I had anticipated that something like this might happen and I sent the file to another lender who approved it. While some rules, like the 4506T transcript processing, are etched in stone, others are subjective, and a different underwriter with different experiences will view the income favorably if the overall file is strong.
The most important rule to remember as we go through the challenges of tough credit standards and tough underwriting is that the lender is not your enemy. The guy or gal who can't close your deal today may be your best friend tomorrow as they help you do a different deal. Good solid loans for good solid borrowers will always find homes. So if the news you are getting going into this weekend is not what you were hoping to hear, don't despair; one man's junk really is another man's treasure.
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