Stated-Income

The Ups and Downs Of Stated Income Loans

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It’s very crucial process for interested homebuyers: choosing among the many home loans that would work for them. The application process itself is even as crucial. It goes to show that home buying is no easy task.

For some unique situations, stated income loans are a perfect fit. This type of mortgage does not require traditional documentation like pay stubs or  tax returns to verify your income.

But just like any other loan, this comes with upsides and downsides. Weighing the pros and cons before making a decision is always a good idea.

Let our lenders guide you to the right path. Make the first step here.»

Advantages

It’s a good option for self-employed borrowers

This is typically a good route for self-employed individuals that are seeking to buy a property of their own. Because of the nature of the activity, finding solid documentation as proof of regular income can be a little tricky. Because stated income loans provide a sense of leniency for those who could not meet the standard documentation requirements for traditional loans, this becomes the next possible choice.

The application process is quick and easy

Coming from their name, stated income loans forgo the fuss that comes with verification and other significant processes that go with the application. When you apply, this loan skips to the part where lenders review and verify your information on your tax returns.

Disadvantages

It typically comes with a higher interest rate

Since it basically comes with a stress-free process, stated income loans charge a higher interest rate. And although it still goes by within industry standards, a higher interest rate means a higher monthly mortgage due.

The risks could be higher for you

In connection with it coming with higher rates, borrowers for this loan should be certain they can carry on the monthly financial responsibility. If you make a hasty decision like purchasing a property that is beyond your means, not being able to meet your obligations could lead to having your loan go into default.

In the end, the biggest decision lies in your hands. With both advantages and disadvantages, it can help you come with a well-thought decision.

Confused? Our lenders can answer your questions.»

How to Remove Someone from the Title of your Property

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There are several different ways to remove someone from the title of your property. How it is done relies solely on the reason for the removal. For example, simply transferring property within family members is a quick and easy process. On the other hand, if you need to remove a deceased person from the title, you will have a little more work on your hands. Following are the details for specific situations regarding removing someone from the title of your property.

Divorce Situations are Tricky

Divorce can be messy, but when there are clear cut decisions made by the court, everyone must abide by what is decided. If you have documents that show that the property is awarded to one partner and that the other partner has no interest in the property any longer, a quit claim deed can be prepared. This document will remove the person that no longer has an interest in the property from the title and give the other partner full ownership.

Tenants in Common and Changing Title

Sometimes two people purchase a home together that are not married. Whether this means a couple that is not yet married or simply two friends that decide to live together, the common way to own the property is tenants in common rather than joint ownership. If one person in the ownership decides that they no longer want to live at this property, they have to deed the property over to the other tenant if the house is not going to be sold.

Death can Complicate Matters

If someone that you own property with has passed away, changing title ownership can be a little tricky. How it gets accomplished greatly depends on the rules where you live and how the title was held. If you had joint ownership, typically the surviving spouse takes over the title and the deceased can be removed with a quitclaim deed.

If there was not joint ownership, removing that person from the deed can be a little trickier. If there was sole ownership, for example, the deed does not automatically transfer to the surviving spouse or any other surviving family members. The deed will likely have to go through probate and the court will award ownership to the appropriate party. The same is true for tenants in common; the probate process will have to take place first before anyone can take ownership.

Officially Removing Someone from the Title

Regardless of the type of ownership held, the bottom line is that a quitclaim deed will have to be executed at some point. This deed will transfer ownership from one owner to another. If all parties are still here with us, everyone involved will have to sign the document. If one party is deceased, his personal representative, as legally appointed, will sign for him.

The quitclaim deed is a simple process that simply details the property’s location with a legal description and accurate address. It also describes each person involved in the transaction, including the grantor and grantee. It is vital that everything in the document is accurate, including the spelling of everyone’s name to ensure that there are no legal battles or loopholes down the road.

The execution of the deed must take place in front of a notary public to make it official. This may or may not need to include witnesses that are not a part of the process. This will depend on the area that you live and your jurisdiction’s rules. Once the notary public signs and stamps the document as official, it can be brought to your county’s recording office to make it a matter of public record.

Once the quitclaim deed is officially recorded, the ownership has officially exchanged hands and the person you wanted to remove from the title of your property is removed. Typically, it is advised that an attorney oversees this process for you to ensure that the title is handled appropriately as even one small mistake could have the property landing in the hands of someone that you did not anticipate taking ownership. The attorney fees for the quitclaim deed are not astronomical and could save you many financial headaches in the future.

How to Buy a home as a Self-employed Borrower?

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Self-employment has many perks including making your own hours and working on your own terms. You probably even have control over the amount of taxes you pay thanks to the plethora of tax write-offs available to you. When you want to purchase a home, however, being a self-employed borrower has its own stipulations that might make the process a little tougher for you.

Tax Returns Speak Volumes

Anyone that works for themselves cannot provide any other income documents other than their tax returns if they want a conventional or government-backed loan. This goes back to the tax write-offs. Lenders take your bottom line income – not your gross income. If you take a large number of deductions, they come right off of the top of your income.

These deductions can include things such as:

  • Retirement plans
  • Medical insurance payments
  • Business meals
  • Travel expenses
  • Vehicle expenses
  • Depreciation
  • Depletion
  • Large non-recurring expenses

The net income you show on your tax returns is the figure the lenders will use to qualify you for a loan. They do not see eye-to-eye with the IRS when it comes to legally reducing their income. A business expense is an expense, which means it takes away from your income. You can think of it like your personal expenses that get figured into your debt ratio in order to determine your eligibility. Because there is not a business debt ratio, lenders use your income after your business expenses.

Some lenders do add back certain expenses, including depreciation and expenses that you can prove were non-recurring. This is the exception to the rule when looking at your bottom line income.

Planning as a Self-Employed Borrower

Everyone needs to plan before purchasing a home, but as a self-employed borrower, you need to plan for a little longer. Typically 2 years ahead of time, you should start working towards your goal. The number one place to focus is your tax returns. What types of expenses do you write off? Does it really hurt your bottom line? If so, it is time to scale back on some of those deductions. After you close on your loan, you can start deducting those expenses again.

You should also start saving money ahead of time. You will need the standard down payment on government loans, such as 3.5% on an FHA loan, but you might need more on a conventional loan. There is a Fannie Mae program that allows for just a 3% down payment, but being self-employed might make you too risky for this program. Lenders like to see larger down payments when there is a significant risk in your file. Self-employment is that big risk, so the more money you have to put down, the more compensating factors you provide the lender.

Other ways you can plan ahead deal with your personal finances. If your credit scores are low or even borderline, start working to build them up. If you have a lot of outstanding debt, start paying it down. If you had some late payments in the past, start making your payments on time for the next 12 to 24 months. Each of these actions will help to increase your credit score.

Let’s take a look at two examples:

  • Joe owns his own business and his net income is significantly lower than what he brings into his household income. He did, however, plan ahead and save enough money to put 20 percent down on the home he wishes to purchase. His debt ratios fall into line with the standards, 28/37, and he has been self-employed for 5 years. John has a credit score of 720, as well. Although his income is risky, he shows many compensating factors and he has a lot invested in the home with the 20% down payment.
  • John also owns his own business. He has only owned it for 2 years, though. John did not have a lot of opportunity to save for a large down payment since he just opened his business, so he has 10% to put down. John’s debt ratios are also a little higher because of the many expenses he has for starting the business that leaked into his personal finances – his debt ratios are 29/41. John’s credit score is a little lower too; he shows a credit score of 690 right now.

Between the two examples, lenders would look at Joe more favorably because of the number of compensating factors he has including the higher credit score. Lenders will not base the eligibility on the credit score alone; however, they look at the big picture to see how everything fits together.

Keep your Income Increasing

It’s pretty obvious that lenders do not want to see income decreasing year over year. It is acceptable to have a slight decrease, but anything drastic will hurt your chances for a mortgage. Trying to time your mortgage application after two years of steadily increasing income will work to your benefit. This does not mean the entire year has to be on the upswing – every business has its peaks and valleys. Lenders take a 24-month average of the income from your tax returns; as long as that second year’s bottom line is slightly higher than the previous year, you show an increase.

Buying a home as a self-employed borrower is not as hard as it seems. The biggest hurdle is the amount of time you need for planning. You need extra time to figure out your tax situation and to have plenty of money saved for a down payment. Aside from that, everything else remains the same as a salaried borrower – you need good credit, low debt ratios, and steady employment, whether or not it means working for yourself.

If you are self-employed, it works best to shop with different lenders to see who has the best program. Some lenders are more lenient than others, so you can see which programs will work to your benefit as well as which will save you the most money every month.

Are Income Tax Returns Required for Mortgage Approval?

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As you get your documents ready for mortgage approval, you probably have many questions. What you need to provide is often the most asked question. How far deep into your income does the lender need to dig? Are your paystubs enough? What about bank statements and income tax returns? Does every applicant have to provide those documents? Every situation is different, but the one answer across the board is that not every person needs to provide tax documents, but you have to meet certain requirements in order to not need them.

How are you Paid?

The first question to ask yourself is how are you paid? Do you receive regular paychecks on a weekly, bi-weekly, or monthly basis? If you do receive paychecks, you are on the right path, but you have to take it one step further. What type of income is that you receive on your paychecks? Do you receive a salary, commission, bonus, or a combination of the three? This is what determines whether or not you need to provide your tax returns for mortgage approval.

If you are a salaried employee and your income never changes unless you get a promotion or raise, you probably do not need to provide anything more than your paychecks and W-2s for the last two years. On the other hand, if your income is fully or partially comprised of commission or bonus income, you will need to provide your income tax returns for verification purposes.

The reason behind the lender requiring your tax returns is for them to compare the income reported on your returns to the income on your W-2s. If there is a discrepancy between the two, the lender needs to figure out the reason why. Generally, it is because people that work on commission and/or bonuses have expenses that come out of their own pocket. These people then write these expenses off, which comes off of the top of their income. Mortgage lenders use the income that you report after the expenses, rather than before for your qualifying income in order to ensure that you can afford the loan.

»Get to know if your income tax return qualifies. Ask a lender today!»

Do you Own a Business?

If you own a business, you will always have to provide your tax returns to the lender for qualification purposes. The tax returns will show the lender not only how much money you bring in, but also all of your expenses. Generally, there are quite a few expenses that business owners write off including depreciation. In addition, many business owners have business losses or capital gains that need to get figured into the household qualifying income to determine if you are eligible for a loan.

What other Income do you Have?

Even if you are a salaried employee with straightforward income and no unreimbursed employee expenses, there is another case where you would need to provide your income tax returns and that is if you are a landlord and rent property out. If you do rent a property out, the lender needs to see what types of expenses you have. They cannot use the amount of rent you charge at face value – they need to see what the net rent is that you receive. For example, if you charge $1,500 per month in rent, but it costs you $500 per month to keep the property maintained and running, then you only take in $1,000 in rent. The lender needs to see these expenses and use the proper income in order to qualify you for the loan.

Income Tax Returns Tell a Story

Your income tax returns help the lender figure out your financial story better than any other document can do. Because most lenders must use the money that you report to the IRS and no other income, you are able to show your true financial worth this way. For example, if you do not claim the rental income you make every month, the lender cannot use it for qualifying purposes. On the other hand, if you have commission income that varies, but you do not write off any expenses, the lender can use the full value of that income on an annualized basis.

The tax returns help the lender figure out what he should do and how risky your loan file really is after digging deeper than your paystubs and W-2s. The tax returns are official documents that must match up with the transcripts of your tax returns the lender can request from the IRS with IRS Form 4506-T. This way you are able to prove your worth alongside your compensating factors, such as assets and good credit in order to obtain the mortgage financing you desire.

»Get to know if your income tax return qualifies. Ask a lender today!»

What Different Paperwork is Required for Stated Income Loans?

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What Different Paperwork is Required for Stated Income Loans?

Stated income loans are not a thing of the past – they still exist, and in fact, are making quite a comeback lately. More and more people are becoming self-employed thanks to the downfall that the economy took, making fewer jobs available, which forced people to look outside of the normal ways of making money. This, in turn, has forced lenders to open up the door to stated income loans in order to keep the housing history thriving. So what is different about these loans when it comes to qualifying?

No Tax Returns

In most cases, you will not need to provide your tax returns for qualifying purposes. Some lenders might want to see them just to see that you do make money and that your write-offs are the only reason that you do not qualify since the lender can only use the bottom line income on your tax return, not the gross income. In some cases, lenders are able to add back specific expenses into your net income, making it easier for you to qualify for a fully documented loan. In the cases that the tax returns do not help your case, however, the tax returns do not need to be used – the lender can ask for alternative documentation to provide to the underwriter.

Bank Statements

In almost every case, bank statements are necessary in order to qualify for a stated income loan. This might seem strange since you are “stating” your income, but the lender has to have some type of verification that you physically receive the money, which is usually done with your bank statements. You will have to decide which type of bank statements to provide the lender though – either business or personal bank accounts. If you choose business accounts, you cannot also provide your personal accounts because there is the risk of using the same funds twice (receiving them in your business account and transferring them to your personal account). In addition, if you do not own the business by yourself, you will have to split the amount of assets in the business bank account, which could lower the income that you are able to claim, so choosing the right bank account is a crucial step.

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CPA Letter

If you are choosing a stated income loan, it is likely because you are self-employed. Because this means you will not have W-2s and paystubs to prove your income from a reputable source, lenders require that you obtain a letter from your CPA stating that you are in business for yourself. This letter must be on the CPA’s letterhead and include the following information:

  • The name of your company
  • The date you started your business
  • The date the CPA started handling your finances and taxes for you
  • Any other pertinent information he has about your business

The reason behind the CPA letter is to have a non-interested party verify your self-employment. Just having you say that you are self-employed is not enough verification for a lender; they need to diminish their risks as much as possible.

IRS Form 4506

Even though you do not provide your tax returns for qualification purposes, some lenders require your tax transcripts just to prove that you filed taxes. They will not use the income reported on the transcript, but will just use it for verification purposes. It is another layer of protection for the lender as they are taking a chance on you by providing a loan without fully documenting your income. The Form 4506 is just a form you need to sign and provide your social security number, giving the lender permission to obtain your tax transcript.

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Rental History

If you have not owned a home in the past, the lender will require some type of housing history from you in order to qualify for a stated income loan. This does not mean if you are a first-time homebuyer that you will not be able to get a stated income loan – but you will have to show financial responsibility with housing payments in the form of rent. Lenders typically want a 12-month history of your rent payments. The verification must either come directly from your landlord on an official Verification of Rent form or from your bank account in the form of canceled checks to show not only that you paid the rent, but the date that the landlord cashed it and that they were always on time payments.

The Remaining Documents

The remaining documents needed for a stated income loan are those that are also needed for a standard loan. These documents include:

  • Uniform loan application
  • Standard appraisal
  • Gift letter for any gift funds you receive from family, friends, or your employer
  • Title documents
  • Credit reports and proof of any liabilities
  • Proof of homeowner’s insurance
  • Proof of flood insurance if the home is in a flood zone
  • Any letters of explanations for unique circumstances surrounding your loan

The stated income loan might require you to get a little more creative with your documentation to obtain a loan, but it is worth the effort. The stated income loan is looked upon a little stricter than a fully documented loan because of the higher level of risk you provide the lender when you cannot fully verify your income. The lender needs to make sure that all of the bases are covered in order to minimize the risk they face.

Every lender requires different documentation for any type of loan, but especially the stated income loan. Because this is a non-qualified mortgage, the lender does not have to abide by the standard QM guidelines, but can add their own requirements, called lender overlays to ensure that the loans they provide are low risk and profitable for them. As stated income loans continue to increase in popularity, lenders will begin to open up the possibilities for a variety of borrowers, but for the time being, you might have to search a little harder to find a lender willing to provide you with a loan.

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Who Qualifies for Stated Income Loans?

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Who Qualifies for Stated Income Loans?Stated income loans might seem hard to come by today, but that is only because their name has changed. Rather than stated income mortgage, they are now oftentimes called alternative documentation loans or even bank statement loans. These loans are typically reserved for self-employed borrowers that cannot fully document their income, but they can also be used for borrowers that work on commission, bonus, or those that cannot fully document their income in the standard way. The difference today with stated income loans versus how they were 10 years ago is that borrowers still have to verify their income in some way – the option to have a “no doc” or “no verification” loan is a thing of the past. Lenders can no longer take your word for what you make based on your excellent credit score alone; they need proof.

What Type of Work can you Do?

There are no guidelines determining what type of employees can qualify for stated income loans. In general, however, people in the following professions use this program:

  • Self-employed borrowers that do not draw a salary
  • Employees of a company who work on 100% commission
  • Employees of a company who work on a small salary and a majority commission
  • Employees that work overtime and/or on a bonus structure

Honestly, you can do just about anything as long as you work and can prove it. If you do not have standard paystubs to show your regular income or your income fluctuates quite a bit, bank statement or stated income loans are a great option.

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How do you Qualify?

That being said, just being self-employed or working on commission is not enough to qualify you for the loan; you have to meet certain other requirements. Because this is not a regulated program, such as FHA or even conventional loans, every lender has their own requirements. Across the board, stated income loans do not meet the Qualified Mortgage guidelines because one of the requirements of QM is that income is fully documented. Since you are not fully documenting your income with this program, you instantly fall out of the QM realm. This means the lender can make up their own guidelines as long as the loan meets the Ability to Repay Rules.

The Ability to Repay Rules state that the lender did its due diligence in determining that you could afford the loan, no matter how your income was verified. If the lender uses bank statements, they need to use an adequate number of bank statements to determine an average income, given the rise and fall of your income throughout the year, to ensure that the new mortgage payment will not put you in jeopardy at different parts of the year. As long as the Ability to Repay Rules are met, the loan can close – it just cannot be sold to  or Freddie Mac; most lenders keep these loans on their own books.

Typically, lenders look for a variety of compensating factors to ensure that you are a good risk. These factors include:

  • Great credit scores – A score above 700 is usually desired, but every lender will differ in what they allow. The higher your credit score, the greater your likelihood of getting approved.
  • Large down payment – The average down payment required is 30% of the sales price of the home, but every lender differs. In any case, the more money you put down on the home, the greater your chance of getting approved.
  • Reserves on hand – Most lenders like to see at least 12 months’ worth of reserves in a liquid account to use in the event that your income were to become unavailable, enabling you to still make your mortgage payments.
  • Low debt ratio – The lower your debt ratio, the more likely you are to get approved for the program. There are no exact maximum debt ratios across the board; every lender has their own threshold for what they will accept.

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Look at your Options

If you are a self-employed borrower that has tax returns that show an income, consider talking to a lender about a fully documented loan. You will not know the amount of qualifying income they will use until they evaluate your income. Some lenders add certain expenses back into your net income reported on your tax returns, making your qualifying income higher than you anticipated. The most common expenses to add back are depreciation and depletion. Some lenders will also add large expenses that are considered a one-time expense, if you can prove that they do not reoccur.

If you cannot qualify for a fully documented loan, shop around with banks that offer stated income loans. If you shopped with 3 different banks, chances are you would find 3 different programs available to you. Some lenders have a minimum down payment requirement that is higher than others, while other banks have a lower threshold for high debt ratios. Whatever the case may be, you need to shop around and compare the different programs you are eligible to receive. In addition, every lender will have a different interest rate that they offer – some will be higher than others, so know what you are getting yourself into.

When you compare the loans, do not just compare interest rates, though; make sure you compare the fees charged as well. You can determine which is better, taking higher fees or taking a higher interest rate after you determine how long you plan to stay in the home. If you take the higher fees, you can determine how long it would take you to break even on those fees with the money you would save on the lower interest rate to determine if they are worth paying or not. In the end, you can always refinance down the road, once your income is more stable and you are able to fully document it, if the interest rate you are given is too high to handle for the term of the loan.

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Fannie Mae Tax Transcripts Requirements

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Fannie Mae Tax Transcripts Requirements

Tax transcripts are official transcripts obtained from the IRS. The use of these transcripts is to verify that the tax returns you provide to a lender are legitimate and not altered in any way. There are certain situations when the transcripts are required and also certain situations when the lender does not have to execute the IRS Form 4506, but may choose to do so in order to satisfy their own requirements since it is their right to add their own overlays onto the standard Fannie Mae requirements.

When are Tax Transcripts Required?

Tax transcripts are necessary whenever you need to provide your tax returns to qualify your income for a mortgage. This includes borrowers that are self-employed, work on commission, or get a great deal of overtime in addition to their regular salary. If you want this type of income included in your qualifying income, tax returns are necessary in order to qualify. If you must provide full tax returns, Fannie Mae requires that the lender verify those tax returns with the IRS. Form 4506 helps the lender obtain a transcript and compare it with the tax returns you provided to them at the time of application for the loan. If the amounts match, the loan can close as planned. If the amounts do not match, however, further verification will be necessary. Following are the circumstances that would warrant a lender to ask for your tax returns:

  • Commission income that totals more than 25% of your regular income
  • Income you receive from a family member that is also your employer (family owned business)
  • Income from a rental property if you use it for qualification purposes
  • Seasonal income
  • 1099 income
  • Interest income
  • Self-employment income that totals more than 25% of your income
  • K-1 income

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When are Tax Transcripts not Required?

Not every self-employment or commission situation will require tax returns or tax transcripts. The basic rule is that this type of income must make up at least 25% of your income in order for tax returns to be required. For example, if you work overtime, but the income does not equal 25% of your regular income, it can be verified with your paystubs and W-2s alone. The same is true for self-employment income that you may have on the side or commission income that your employer pays you. Other types of income that do not require tax returns or tax transcripts include:

  • Social security income
  • Military income
  • Disability income

Any of these types of income can be verified using W-2s and paystubs or a letter from the party providing the income on their letterhead along with bank statements to show receipt of the income.

Not a Pre-Closing Concern

Form 4506 must be executed, but it is typically not a condition to close the loan, unless there is reason to suspect that the borrower’s tax returns are not legitimate. Every lender can use their own judgment when it comes to determining if a borrower is legitimate or not. If the income is determined as legitimate, the lender is required to execute the 4506 at closing. In addition, you sign a document at closing stating that everything is accurate and true that you provided on your application.

What do Lenders Look at Tax Returns For?

You might wonder why lenders require tax returns in the first place. It makes sense if you do not have paystubs or W-2s to document your income, but what about the cases where you do have those documents, such as commission income or overtime income? Why is there the double requirement to verify your income? The answer is simple – the lender needs to determine if there are any unreimbursed expenses that you pay in order to hold that job. Fi there are such expenses, they must be deducted from your income and/or included in your monthly debt ratio.

This requirement is only put in place when you have self-employment, commission, or overtime income that exceeds 25% of your income. If this income does not exceed that amount, the expenses are not required to be included in your debt ratio or deducted from your income. In most cases, if you have self-employment on the side or you work on commission but only slightly, the debts you incur will report on your credit report, enabling the lender to include it in your debt ratio anyways.

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Rental Income

Not all rental income situations require you to provide tax returns and tax transcripts. If you obtained the rental property after completing your most recent tax return, it will not report on there, but you are still eligible to apply for a mortgage. In these cases, you simply must report the rental on your mortgage application, along with any loss or profit you make in regards to the property. The lender will likely be able to figure out the debts you incur for this property based on your credit report, helping the lender make a sound decision when it comes to your loan application.

Tax transcripts can take a while to come into the lender, so if you know the lender will require them, ask for the forms to be executed as early as possible. In most cases, lenders wait until the closing to execute the document, since Fannie Mae requires them as a part of the post-closing package the lender sends to them. You have nothing to fear if tax transcripts are required as long as you provided accurate tax returns to the lender. Any type of fraud will be uncovered with the tax transcripts, so it is not worth taking a chance with the process. In general, transcripts do not hurt your case when it comes to applying for a loan – as long as you are open and honest and let the lender include all expenses/income in your application in order for the lender to create the most accurate picture of your financial situation.

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Here’s Why Refinancing Won’t Necessarily Save You Money

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Here’s Why Refinancing Won’t Necessarily Save You Money

Contrary to what many people think, refinancing for a lower rate won’t necessarily save you money in the long run. A mortgage loan is more than just the interest rate. In other words, when evaluating whether or not a new mortgage will benefit you, it’s important to dig deeper than just comparing the new rate to your old one.  Yes, the new interest rate may be lower than the old one, but that doesn’t mean it’s actually saving you money!

To illustrate the point, consider John, who is shopping around to refinance his mortgage. John’s goal with refinancing was not to reduce his payment, but to pay off his home fast and keep his interest bill as low as possible. His existing loan is a 15-year fixed financed at 4.75% with 7 years left before it is paid off. With a new 10-year fixed loan, he can get a 3.375%.

At first blush, this sounds like a pretty good deal, right? A shorter loan term and a big rate reduction should be a no brainer, right? Not necessarily! Let’s look more closely at the numbers:

Current 15-year Fixed Loan

  • Start date: 8/1/2003
  • Original balance: $245,000
  • Interest rate: 4.75%
  • Principal and interest payment: $1,905.69
  • Remaining Balance: $128,557

With a little less than 7 years left, John has $21,992 in interest remaining on his current loan – assuming he makes just his regular payment for the remainder of the loan term. Now, let’s take a look at the numbers on the new 10-year loan:

New 10-Year Fixed Loan

  • Start Date: 2/1/2012
  • Starting Balance: $134,000 (to cover closing costs and escrow deposits)
  • Interest Rate: 3.375%
  • Principal and interest payment: $1,317.24

Though John can get a much better interest rate, he isn’t actually saving any interest over the life of the loan by refinancing. The total interest bill on the new loan over the next 10 years is $24,068, which is $2,076 higher than what he has left to pay on his current loan. Closing costs are $2,893, so the new loan puts him in the hole nearly $5,000 to get that 3.375% 10-year fixed.

Even if John makes extra payments on the new loan to keep him on the same payoff schedule he has now (7 years), he still doesn’t save a whole lot. Paying off the new loan in 7 years reduces the total interest bill by $5,353, but when you add in closing costs, net savings are only $2,460 over a 7-year period – a mere $351 per year.

Again, a loan is much more than an interest rate, so it’s important to run the numbers and make sure a new loan truly benefits you. A better interest rate doesn’t necessarily mean you’ll actually save money in the loan run.

What Exactly Is a “No-Cost” Refinance?

You probably see ads all the time for “No-Cost Refinancing”, but what exactly is it and how do some lenders offer it and some don’t?  The truth is, all lenders can offer it and probably do, and it’s just that some use it as a marketing gimmick.

A true no-cost refinance is one in which the lender literally picks up all of the fees, with exception to your escrows (assuming you have escrow taxes and insurance) and pro-rated interest.  So you don’t pay any fees; no appraisal, no credit report, no title search, nothing.

So how does the lender do it?  Understanding this requires knowing how lenders are compensated.  Most lenders are compensated by the banks and mortgage companies to whom they sell or broker loans.  Typical compensation for a lender who wants to be competitive is .75 – 1% of the loan amount.  This means that for a $200,000 loan, the lender would be paid $1500 – 2000 for originating the loan.  Each day, lenders receive rate sheets from all of the banks and mortgage companies showing what the compensation is at different rates.  So if at 6% the lender is getting paid 1%, then at 6.125% they would be paid approximately 1.5%, and at 6.25% they would be paid approximately 2%.  As you can see, the higher the rate at which they lock you into a mortgage, the more they are paid.

That is where the no-cost refinance comes in.  Whereas a traditional refinance involves a locked rate based on specific closing costs, the no-cost refinance is at a higher rate with no closing costs.  The lender actually quotes you a higher rate and uses the compensation to pay for the closing costs.  Using the example above, at 6.25% the lender is getting paid $4000 by the bank or mortgage company for originating your loan.  If the total closing costs are only $1600, the lender nets $2400 compensation from your loan, and you paid nothing to do it.  Or did you?

You see, you haven’t yet, but you will.  That’s because when you choose a no-cost refinance option, you’re getting a rate that is .25-.375% higher.  So you’re basically financing the closing costs in the interest rate, something that can add up over time.  Let’s take a look at an example.  The interest on a $200,000 loan at 6% = $1000/month and a $200,000 loan at 6.25% = $1041.67.  So the difference between the traditional refinance and the no-cost refinance is $41.67 higher each month.  That means that if closing costs run $1600, you would start losing on this option after 38 months, which is the break-even ($1600/41.67=38.4).

So longer term a no-cost refinance may cost you a lot more that what it might have costed you if you had paid all the closing costs from your own pocket. Do a comparison analysis and carefully make the right choice on your next mortgage refinance.

You Can Get a Mortgage with Little to No Down Payment

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You Can Get a Mortgage with Little to No Down PaymentIf you took a survey of adults that still lived with their parents, you would probably find that a majority of them do so because of the lack of savings they possess. Without a down payment, they assume that they cannot purchase a home and they don’t want to waste money on rent, so they remain content on their parent’s couch. The good news is that there are plenty of ways to purchase a home with little to no down payment – you just have to know your options!

20 Percent is not the Only Answer

We are all trained to think that without a 20 percent down payment, a house purchase is not possible. In reality, you can get a mortgage with no down payment with several programs, including the VA and USDA loan program, but you can even get conventional financing with as little as 3% down. The kicker is that you will pay Private Mortgage Insurance in order to give the lender a guarantee that they will not lose out on hundreds of thousands of dollars if you default on your loan. You do not have to stick with conventional financing, though; there are many other options out there that do not charge PMI and do not require large down payments!

VA Loans

If you are a veteran or are actively serving right now, you likely have VA benefits to use. These entitlement benefits enable you to purchase a home with no down payment. In fact, the qualifying guidelines for this program are so flexible, that it would be hard not to qualify. Typically, you need a credit score that averages around 620, although some lenders will go as low as 580; 12-months of on-time rent payments or an alternative credit line, such as insurance or utility payments; and adequate discretionary income which varies by the area that you live. The VA actually focuses more on your discretionary income than your debt ratio – they have a set amount of money that each family size needs to have each month in order to qualify.

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USDA Loans

USDA loans offer the chance for anyone, not just veterans as the VA loans require, to purchase a home with no down payment. The kicker with this loan type is that the home must be located in a rural area, as determined by the USDA, which you can find on their website. In addition, your maximum qualifying income cannot exceed the USDA guidelines, as the program was created for borrowers that have low to middle-of-the-road income. But chances are, if you are living on your parent’s couch, you do not make too much money to qualify for the USDA loan in your area. To qualify for the USDA loan with no down payment, you must have a credit score around 620 (some lenders go as low as 580 for this program too); be an upstanding citizen; and have debt ratios around 29 percent on the front-end and 41 percent on the back-end.

FHA Loans

Last, but certainly not least, are the FHA loans. This program does require a down payment, but it is just 3.5% of the purchase price of the home. So, for example, if you found a home that was not within the USDA rural boundaries and its purchase price was $150,000, you would have to put down $5,250 on the home. The good news is that the money does not have to come just from you – a gift from a family member, employer, or charitable organization can be used to make the down payment. As long as you can source the money and prove that it is not a loan, you can use it for a down payment. The requirements to meet the FHA guidelines are similar to those of the above two loans – your credit score should be around 620, but lower scores are sometimes accepted; your debt ratio should be around 31 percent on the front-end and 43 percent on the back-end; your employment history should be steady; and your income verifiable.

As you can see, there are a variety of ways to get a mortgage without a down payment. The 20 percent rule still applies if you want a conventional loan with no private mortgage insurance, but if you need alternative forms of financing, there are many options out there that are provided by a large number of lenders making it easy to get off your parent’s couch and into your own home!

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Why you Need to Plan for a Mortgage when you are Self-Employed

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Why you Need to Plan for a Mortgage when you are Self-Employed

If you are self-employed, you have a lot of flexibility when it comes to many things, including how your income looks on paper. Most people take advantage of the opportunity to write off every expense and take every deduction they can on their taxes year after year. While this might help you to reduce your tax liability and save you money in the long run, it can hurt you when it comes time to apply for a mortgage. If you are self-employed, it is very important that you plan for the future so that you can have an easier time obtaining a standard mortgage, rather than having to go the alternative documentation route.

What do Mortgage Lenders Want?

Basically, mortgage lenders need to see that you make money on paper. It is not enough to say that you bring in $100,000; you have to show it on paper and not just your bank statements. Lenders need FULL documentation for conventional loans and to meet the Qualified Mortgage Guidelines. This usually means that you have to provide paystubs and W-2s, but since you are self-employed, they will require tax returns with every schedule that you file.

How Tax Returns Hurt You

You might wonder how your tax returns could possibly hurt you; after all, you report your income accordingly. While this might be true, lenders have to look at the bottom line – the income you report and pay taxes on. Chances are, since you are self-employed that the bottom line number is not the number that you actually bring in. This is the number lenders use for your qualifying purposes. This means that if you report a loss, the lender uses the negative income to calculate your debt ratio, which it goes without saying, will not get approved.

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How do you Work Around It?

If you want to take advantage of the low rates that conventional loans offer and avoid the higher rates and costs of alternative documentation loans (bank statement loans) require, you will have to plan accordingly. Lenders use the prior two years’ worth of tax returns to calculate your qualifying income. If you plan far enough in advance, you can avoid taking as many deductions and writing off as many expenses so that your tax returns are a more accurate reflection of the money you bring in on a yearly basis. Yes, this probably means paying more taxes for those few years, but if it helps you get a more affordable mortgage, it can be worth it.

Remember that lenders will need the last 2 years’ of tax returns. If you have one good year, but the year prior to that reported a loss or very low income, the lender will take an average of the 2 years. If this average is not high enough, you will not qualify. They do this in order to account for the lows and highs that you go through as a self-employed person. If your company provides products or services that are seasonal, chances are your income is cyclical, which means high at some points and low at others. Lenders need to make sure they are accounting for those low periods, which is why they take an average.

The earlier you start planning for a mortgage when you are self-employed, the more likely it is that you will be able to get approved for a conventional loan. Work with a lender or your tax accountant to figure out the way to work it out with your income so that when the time comes to apply for a mortgage, you are able to get the low interest rate and terms that you can feel good about.

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