Stated-Income

Can a Seller Back out of a Contingent Offer?

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As the seller of a home, you have very few ways to back out of a signed, sealed, and delivered purchase contract. Once both parties sign the contract, it becomes legally binding. While buyers often have contingencies that give them a way out of the sale under certain circumstances, sellers don’t have that same luxury.

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Does this mean that sellers can get out of a contract? There are ways, you just have to know how to go about them.

The One Contingency That Favors Sellers

There is one contingency that buyers can put in place that actually favors the seller. It’s the financing contingency. Buyers that need mortgage financing to buy the home make the purchase contingent on their ability to secure financing. Typically, buyers get 30 days to get a ‘clear to close’ on their mortgage. If they can’t secure the ‘clear to close’ in that time, they can back out of the contract without losing their earnest money.

The coin flips both ways, though. Sometimes a buyer may not want to back out of the contract, especially if they know they are close to getting a clear approval from their mortgage company. The seller, on the other hand, may want to cancel the deal, though. This happens when a seller knows there are other potential buyers waiting in the wings or when the seller just gets too nervous to wait for your financing. In this case, the seller could cancel the contract because of a lack of financing and move onto another buyer willing to bid on the home.

The Inspection Contingency May Help Too

One other contingency that may help sellers, but it’s not always the case, is the inspection contingency. This contingency gives buyers a way out of the contract if the inspector finds major things wrong with the home. Actually, the buyer has two choices – walk away from the sale or ask the seller to fix the issues. Typically, sellers don’t want to put any more money into the home, which could leave them with the ability to walk away from the sale.

While sellers don’t want to lose a bid on a home, the inspection contingency could be helpful again, if there are bidders waiting in the wings. Many buyers won’t bid on a home that is ‘under contract,’ but will still watch closely to see if it falls through.

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If the contract does end, new bidders can compete for the home. Of course, there is always the risk that the new bidders will ask for the same issues that the inspector found to be fixed or ask for a credit for the cost of the repairs, assuming it will pass an appraisal for financing purposes.

Paying to Back out of a Contract

If you don’t have an ‘easy way out’ like discussed above, you may face financial consequences of backing out of a contract as the seller. This doesn’t mean that you can’t back out; you just need to be aware of what it might cost you.

First, you’ll probably have to return the earnest money, as it’s only fair. You may also have to cover any damages the buyer incurs, such as any costs the buyer paid for the inspection or appraisal; any costs the buyer incurs to find temporary housing; any legal costs the buyer incurs.

The Seller Contingencies

In some cases, sellers do put their own contingencies on a purchase contract. While it’s not common, there are ways you can protect yourself if your attorney thinks it’s a good idea. A few of the most common seller contingencies include:

  • Inability to get signatures from other family members that have a stake in the home (common with inherited homes)
  • The seller’s inability to find another place to live
  • Unique circumstances, such as health concerns, that cause the seller to be unable to follow through on the sale

It’s best if you talk to an attorney about your ability to back out of a sale. In general, the buyer has the say in backing out while the seller must adhere to the contract or face financial consequences. Your attorney may have ways that you can get out of the contract though, if you find that it is necessary to do so.

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Which Closing Documents Should You Keep After Buying a Home?

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After you sign the large stack of papers that the lender puts in front of you at the closing, you probably wonder which of those documents you actually have to keep. There are what seems like hundreds of papers, do you really need all of them cluttering up your home?

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While you probably don’t need every document, there are certainly some that you will want to keep, as they can be important to you down the road.

Purchase Contract

You signed a purchase contract when you agreed to buy your home. This document outlines your rights as well as the rights of the seller. The rights are held up to the letter of the law. This means if the seller doesn’t follow through on promises made in the legally binding contract, you could take legal action against him/her. The same is true if you don’t follow through on your end of the bargain too.

Keeping a copy of the contract handy will help you understand your rights and what you promise to do as the buyer. If you have any questions, you can refer back to the document or use it to show the seller when/if they are not following through on their promises.

Purchase Contract Amendments

If after you sign the contract, you have to put in a few amendments, you should keep a copy of them as well. Many buyers have an amendment after they have the survey, inspection, or appraisal done on the home. If there’s something that they have to renegotiate with the seller or the seller agrees to fix something, it should be put in writing as an amendment to the purchase contract.

Again, keeping these documents at home can help to keep the seller accountable if anything comes up down the road. If at your final walkthrough the seller didn’t’ do as promised, you can request a later closing date. You’ll also want to keep the addendum long after the closing in case anything comes up with the issues the seller was supposed to fix or otherwise care for before you closed on the home.

Seller Disclosures

Sellers are obligated by law to disclose any issues with the home that they know of at the time of the purchase contract. If something comes up down the road that is wrong with the home and it can be pinpointed back to before you bought the home, you can use the seller disclosures to prove that the seller didn’t disclose the issue.

While you don’t want to think of having legal issues after you buy the home, something could come up that could make you want to seek legal action against the seller. If you don’t have proof that the seller didn’t disclose a major issue, you may not win the case in court.

Closing Disclosure

The Closing Disclosure breaks down all of the fees you pay to get your mortgage. It also discloses the terms and interest rate of your loan. It’s an easy document to come back and reference should you have any questions about your loan’s term, interest rate, or payment.

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You can also use the Closing Disclosure at tax time. When you have your tax professional prepare your taxes, you can inquire about writing off any of the closing fees that you paid. While it’s tougher this year to get any deductions outside of the standard deduction, you never know when an expense might be able to be written off on your taxes. This form is the easiest way to prove that you paid the fees.

Mortgage Note

The note will show the name of the lender, the interest rate of the loan, and the amount of money borrowed. It’s a good reference to have should there be any issues down the road. The note can also be proof that you need moving forward if you want to take out a second mortgage or you want to refinance your current loan. Lenders use the note to have concrete proof of your original loan amount and the interest rate you pay.

Mortgage Deed

The mortgage deed is what gets recorded with the county and becomes public record. This is what proves your ownership of the home. Hopefully there aren’t any issues that come about regarding your ownership in the home, but if they do, the mortgage deed would be your best way to prove your ownership, especially if the issue went to court.

Title Insurance Policy

When you take ownership of the home, the lender requires that you purchase lender’s title insurance. You also have the opportunity to buy an owner’s policy. The title insurance policy protects you should anyone come and try to stake a claim in your property.

Again, if the case had to go to court, the title insurance policy would help prove your case as well as help you cover the cost of the court and lawyer charges.

While it’s best if you keep all of the closing documents you are provided, the above documents are the most important. They can help you during tax time as well as if any issues arise with the home or its ownership in the future.

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How Many Months of Payslips do you Need to Get a Mortgage?

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One major factor in your ability to secure a mortgage is your income. You must show lenders that you can afford the mortgage as well as your other monthly debts and still have money left at the end of the month. Lenders need to make sure beyond a reasonable doubt that you can afford the mortgage before they can allow you to sign on the dotted line.

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Just how do you prove your income? It depends on the type that you earn. For example, if you work on commission and it totals more than 25% of your total income, the lender will need your tax returns. If your income is just a base salary or is made up of less than 25% commission and/or bonuses payslips will work.

Covering 30 Days

Your payslips must cover at least the last 30 days. Lenders use these documents to make sure your income adds up to what you say you make. It’s not enough to say that you make $60,000 per year. You have to prove it. Even if you provide your tax returns for other purposes, you must show lenders that your year-to-date income is on par with what your tax returns show.

Because you only need to cover the last 30 days, the number of payslips you must provide will vary based on your pay schedule:

  • Weekly pay – You must provide the last four paystubs
  • Bi-weekly pay – You must provide the last two paystubs
  • Monthly pay – You must provide the last paystub you received

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Paystubs Before the Closing

Some lenders may also make you provide a paystub right before the closing. This reconfirms the fact that you are still employed. This is common practice when a lot of time passes between the application and the closing. If it’s a matter of a few months, lenders must confirm that you are still employed. Some lenders just conduct a verbal verification of employment, but others may require another payslip.

The Other Income Documents

Your payslips aren’t the only income documentation lenders will require. Along with seeing your current income, they also need proof of your past income. If you make a base salary or don’t work on commission, you can provide your last two years of W-2s. These documents will show lenders your salary over the last two years.

If you work on commission or bonuses, the lender may request your W-2s a well as your tax returns. This gives them a chance to determine if you have any unreimbursed expenses that coincide with your employment. If so, the lender will deduct those expenses from your income for qualifying purposes.

This is all in addition to your paystubs. Lenders use the W-2s or tax returns to see your pattern of income. They want to make sure your income either stayed stable or increased over the last 2 years. The payslips will then confirm that you are on the same path this year as your W-2s or tax returns show.

The lender will likely ask for your payslips when they pre-approve you for a loan. They look at paystubs first and then ask for further documentation if necessary. Have your payslips ready when you know you want to apply for a loan so that you can get the process right away.

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What Can be Used as Proof of Income?

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Today everyone has to supply proof of income for a mortgage. The days of stated income or no verification loans are gone. The Dodd-Frank Act ensures that every lender determines that borrowers can truly afford the loan rather than just taking their word for it.

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So what do you need to show that you can afford the loan? Luckily, it’s not just paystubs and tax returns, although those definitely help. There are a few ways you can show lenders that you can afford the loan.

The Standard Proof Of Income

The standard proof of income is one month of paystubs and 2 years of W-2s. The paystubs show lenders your current income and the W-2s show lenders your history of income over the last 2 years. You’ll need to provide W-2s for every job you’ve held over the last two years. The lender will take an average of that income and compare it to your current YTD on your paystubs to see if you are on track with your past income.

Proving Self-Employment Income

What happens if you don’t work for someone, so you don’t receive a paycheck? If you are self-employed, the lender can’t take your word for what you make – that’s a conflict of interest. Instead, they rely on your tax returns from the last 2 years. Your tax returns show lenders how much income you claimed as well as what expenses you wrote off to lower your tax liability.

This can be a double-edged sword situation. If you write off a large amount of expenses, it will bring your net income down. Unfortunately, in this case, lenders must use your adjusted gross income – they cannot use your gross income because the expenses come out of your own pocket. This could mean that your reported income is much lower than what you actually make. This could make it harder to secure financing.

The best way around it is to lessen the amount of expenses you write off for the year or two leading up to your mortgage application.

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Proving Other Income

There are also other situations where you might need to provide proof of other income, such as:

  • Commission – If more than 25% of your income comes from commission, you’ll need to provide your tax returns. This will let the lender see an average of what you make as well as account for any unreimbursed employee expenses, which often happens with commission-based income.
  • Part-time income – If you work part-time, you may be able to qualify for the loan, but you’ll need at least 2 years of proof of the income. You can get away with providing your paystubs and W-2s for this situation, but remember the lender will take a 2-year average of your income. This will help them account for the seasons of many hours and the seasons with fewer hours.
  • Alimony or child support – You are not obligated to disclose the amount of alimony or child support that you receive, but if you want to you can. You will need to provide a court-ordered document showing the income you should receive as well as proof of receipt of the income. Your bank statements showing the deposits in the exact amount shown on the court order should suffice.
  • Rental income – If you receive rental income for at least 1 -2 years, you may be able to use it for qualifying purposes. You’ll need to provide the lender with proof of the executed lease and proof of receipt of the income. Your bank statements and tax returns are usually sufficient to prove this type of income.

The Exception to the Rule

If you can’t use your tax returns for qualifying purposes because you have too many write-offs, you may be able to get away with it by securing a non-conforming loan. They are otherwise known as alternative document loans. These loans, which lenders keep on their books, have relaxed guidelines.

Some private lenders are willing to accept your bank statements as proof of income in the place of tax returns and/or paystubs. You’ll generally have to provide a full year’s worth of bank statements to show the regular receipt of income. The benefit of using this method is you don’t have to worry about expenses being deducted from your income. In other words, you can use your gross monthly income for qualification, just as you would if you worked for someone.

Proving ample proof of income is crucial for your success in your quest to get a mortgage. Lenders have to be sure beyond a reasonable doubt that you can afford the loan. If you have issues with your income, try finding a subprime or alternative documentation loan that will provide you with the loan that you need.

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How Lenders Calculate Income for the Self-Employed

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The self-employed borrower faces a much larger obstacle when calculating income for mortgage approval than the salaried borrower. Lenders are inherently tougher on those that work for themselves. It’s likely due to the housing crisis and the numerous loans that defaulted because of the lack of income verification.

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Whatever the reason, today’s borrowers working for themselves have a few hurdles they must jump through before qualifying for a mortgage.

It’s certainly not that it’s impossible. You just have to prepare yourself for more paperwork and required documentation than others.

Using Your Tax Returns

The most important document self-employed borrowers can give lenders is their tax returns. Keep in mind, this is not just your 1040. The lender needs all schedules of your tax returns. You’ll see why below.

From your tax return, a lender will take your ‘net business income.’ This differs from the salaried employee. Lenders who are paid by an employer get to use their gross monthly income for qualifying. Here’s an example:

John works for ABC Company and gets paid a salary. His W-2s for the last 2 years show that he made $50,000 per year. His lender will use $50,000 per year or $4,167 per month for qualifying income.

If John owned his own company and claimed that his gross yearly income was $50,000, but only claimed $40,000 on his tax returns, the lender would use $40,000 per year for starters. They would add back certain expenses, such as depreciation and amortization though. Unfortunately, John would not be able to use the full $50,000 salary for qualifying.

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Lenders do not add back expenses you write off, such as cell phones, meals, travel, or vehicle expenses. They will also take a 2-year average of your self-employment income. For example, if two years ago you had $30,000 in net income and last year you had $42,000, the lender would average the 2 years to come up with $3,000 per month rather than $3,500 if the lender just used last year’s income.

Declining Income

If you have declining income, it could pose a problem for your loan as a self-employed borrower. In this case, the lender will not take a 24-month average. Instead, they will take an average of the last year. Here’s an example:

John made $70,000 two years ago. However, last year, he only made $40,000. This is a pattern of declining income. The lender will not give him the benefit of using the $70,000 income, as it will increase his average. If the business continues to decline, he could get qualified for a mortgage that he would not be able to afford.

Instead, the lender would use just the $40,000 income, using $4,000/12 = $3,333 per month as qualifying income.

So you can see the difference, if he were able to use the $70,000 income, his 2-year average income would equal $4,583.

Many lenders will not write a loan for a self-employed borrower with a history of declining income, though. You may have to shop around to find a willing lender. It also helps if you have compensating factors, such as a high credit score and low debt ratio. This helps offset the risk of your business with declining income.

Down Payment Funds and How It Affects Eligibility

One other aspect of your business income lenders will evaluate is your down payment funds and where they originate. If you can prove the funds come directly from your personal account, it may not affect your business income or chances for approval. You will, however, have to prove that the assets are completely separate from the business. In other words, it’s money you set aside through the years rather than money you recently took from the business.

If the funds do come from your business, the lender will evaluate the status of your business. They will need to see asset statements for your business to determine its worth. They will then determine if the funds you took compromise the business at all. If you took more than half of the business’ assets, it could put the business at risk. If, instead, you only took 25% of the business’ assets, it may not be as big of a deal.

Each lender looks at the situation differently, so you may have to inquire with several lenders.

The bottom line is that lenders look over self-employed income very carefully. They do not use the income you make before expenses. They can only use the net business income you claim on your taxes. They will order your tax transcript to make sure the information you provide them is the same information you gave the IRS.

It’s not impossible to get financing when you work for yourself, but it does require a little more work. A lender may even ask for proof of your experience in the industry just to judge your ability to keep the business afloat. Answering the underwriter’s questions and request quickly will give you the fastest answer when it comes to qualifying for a loan as a self-employed borrower.

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Alternative Ways to Demonstrate Mortgage Affordability

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Mortgage lenders are most concerned with mortgage affordability. If you can’t demonstrate that you can afford a loan the standard way, are you out of luck? If you do the right homework, you can find a lender willing to accept alternate methods of verifying your income. The bottom line is you have to verify your income in some manner. The lender has to know that you can afford the loan. But, it doesn’t always have to be the standard way.

What’s the Standard Income Verification?

A conventional or government-backed loan will require you to provide paystubs, W-2s, and/or tax returns. Without these documents, you can’t get these types of loans. They want to see at least the last months’ worth of paystubs and the last 2 years’ of W-2s. If you work for yourself or work on commission, you’ll need to supply your tax returns for the last two years.

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What if you don’t have paystubs or your tax returns don’t show the ‘true’ income you make? This is when alternative loans come into play. Subprime lenders, or lenders that keep loans in their own portfolios, accept other forms of income verification.

Showing Your Mortgage Affordability Your Way

If you don’t meet the mold of the standard income verification method, you’ll have to find another way to verify your income. Lenders must verify that every borrower can afford the loan in some way. The following are the most common ways.

Bank Statements

Bank statements are often used for the self-employed and borrower’s paid on commission. These borrowers often claim a large number of expenses on their tax returns. Because lenders use the net income reported on a borrower’s taxes, this often hurts them. Rather than using their taxes, they show their bank statements for the last 12 months.

The bank statements you use should show consistent deposits. This shows the lender that you make regular income. Of course, the income you show must be in line with the income that is standard for your industry.

Investment Statements

If you don’t work, but rather survive on your investments, you can use your investment statements to show mortgage affordability. You’ll have to prove that you make enough income from your investments to cover the mortgage payment plus all of your living expenses. Basically, the investment income takes the place of your standard income.

3rd Party Income Verification

If you are self-employed, a letter from your CPA or tax accountant may also help you get qualified for a loan. This 3rd party can confirm the amount of income you make as well as its consistency. Usually lenders will require year-to-date Profit & Loss Statement along with the CPA letter.

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What’s the Catch?

It seems too easy to qualify for a loan with alternate forms of income verification. There has to be a catch, right? There is, but it’s not horrible – you’ll just pay more in interest. Lenders base your interest rate on the riskiness of your loan. If you don’t verify your income the standard way, you are automatically riskier.

Lenders often charge more upfront on the loan as well. They may charge origination points or discount points. Origination points are points to get the loan processed and closed; it’s like an extra fee on top of the other closing costs. The discount points are points you pay to buy the interest rate down. No matter which one you pay, you pay them upfront.

Lenders use this money as instant profit. If you were to default on the loan down the road, they have the money they made upfront as a consolation prize of sorts. It’s not the ideal situation, but it helps lenders be able to write riskier loans such as these.

Today it’s a little harder to find alternative ways to prove mortgage affordability. With the Qualified Mortgage Rules along with the Ability to Repay Rule, lenders are more careful about who they lend money to. It’s always a good idea to provide compensating factors to help your case. The more stable your income and the more reserves you have on hand, the better your chances of approval. In addition, if you have a high credit score and low debt ratio, your chances of approval get even higher.

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Can You Get a Home Renovation Loan With Low Documentation?

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Renovation

Low documentation loans took a back seat after the housing crisis. Lenders became leery of stated income loans. They chose to require full documentation for all loans, including home renovation loans. However, today, they are making a comeback. You may even find that you can fix up your home without fully documenting your income.

We help you discover just how this works below!

Great Credit Scores are a Must for a Renovation Loan

First, you need a great credit score. No lender will consider you for a low documentation loan if you are high risk. A great credit score shows the lender that you are financially responsible. Just what makes up a great credit score is subject to opinion, though. Each lender has their own preference. Because these lenders keep these loans on their own books, they can make up their own rules.

Using Personal and Business Bank Statements to Qualify

Self-employed borrowers often have personal and business bank statements that show their income. If you need to use a combination of both, you’ll also need to provide a Profit and Loss Statement. The lender uses the P&L to determine your income. Keep in mind, though, the expenses you claim must be normal for your industry. The lender will look closely at your expenses to make sure.

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Once the lender determines your average income, they’ll look at your personal and business bank statements. They want to see deposits equal to the amount of your average income. They often allow a fudge factor of 5% either way, but anything less than 5% of the amount will raise a red flag.

Using Only Personal Bank Accounts

If you don’t want to disclose your business bank account information, you may be eligible to use your personal accounts alone. You’ll have to be able to prove regular deposits from your business in order to qualify, though.

The lender may not need a P&L for this type of verification. Instead, they’ll look at your personal bank accounts and at the regularity of deposits. They’ll generally need 24 months of your bank statements in order to qualify you for the loan. They may also ask for a few months’ worth of your business bank statements in order to ensure that your business and personal accounts remain separate and that they don’t share funds.

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Using Only Business Bank Statements to Qualify

Lastly, you can use your business bank statements alone to qualify. You’ll need to provide a P&L for the lender to determine your regular income. They will then ensure that you have the appropriate deposits in your business bank account.

In this case, you’ll also need proof from a third party that you operate a business and that everything you state is true. This usually comes from your CPA or tax preparer. It helps give the lender reassurance that the money you provide them truly is yours.

Qualifying for the Renovation Loan

Once you prove you have the credit score and the income for the renovation loan, the rest is easy to satisfy. The lender will likely want to know what renovations you will make. This way they can get a true value of the home after renovations. This helps them determine if the loan is a favorable one for them to write.

Some lenders may require that you get approval for the renovations from them before you begin. This helps them determine what you use the funds on and how you proceed. For example, they want to prevent you from sinking money into your home that won’t provide a return on your investment. If they give you $20,000 and you use it to make cosmetic changes, it won’t have any effect on your value. However, if you renovate your kitchen or bathroom, you’ll likely see a return on your investment.

Lenders each have their own requirements when it comes to renovation loans with low documentation requirements. The good news is that they are out there! You will have to search for them and compare the offers from different lenders. Make sure you know all of the details before settling on a lender to make sure you get the best deal possible.

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Low Doc Loans – Are They Out There?

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Woman

Mortgage applications today mean supplying what feels like pounds of paperwork. The days of the low doc loan seem long gone. Just when you think you’re done, the underwriter asks for more. What if you don’t have the paperwork they need? Are you out of luck?

The good news is, you still have a chance at finding a mortgage. The bad news is it will require quite a bit of shopping around. You’ll need to find a lender willing to keep the loan on their books. A loan that doesn’t fully document their income the “right” way is a non-qualified loan. Not all lenders offer these programs because they can’t sell them on the secondary market.

That doesn’t mean there aren’t lenders out there. You just have to know what to look for and how to shop them.

Who Benefits from a Low Doc Loan?

First, let’s look at who could use a low doc loan. Generally, it’s the people who can’t fully document their income. This does not mean they can’t afford the loan. It means they can’t prove their income with paystubs or W-2s, the traditional way. Instead, they use things like bank statements or investment statements. These people may have a lot of money and can easily afford the loan. However, without those paystubs or tax returns, they can’t get a loan.

The most common people looking for this mortgage alternative are:

  • People who work for themselves or a family member
  • Borrowers with limited work history because they just started out or are at a new job
  • Borrowers living on their investments or on retirement income

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These people can’t verify their income the traditional way. But, what they can do is verify that they can afford the loan. This is a key factor for any loan. Whether a loan is qualified or not, lenders must make sure the loan meets the Ability-to-Repay Rule. Basically this means the lender made sure the borrower can afford the loan.

Don’t Shop for a Stated Loan – Look for Low Doc

If you haven’t shopped for a mortgage in a while, you might be used to shopping for a stated income loan. These loans don’t exist any longer. You have to verify your income in some manner. You can’t just state your income and let the lender give you a loan. That’s likely what led to the housing crisis. Lenders can’t do that anymore because of the Ability-to-Repay Rule. They must verify your income, even if it’s in an alternative way.

A low doc loan means the lender accepts alternative forms of income verification. Rather than paystubs, you might provide bank statements. In some cases, self-employed borrowers don’t want to supply their tax returns. They have too many expenses written off on them. Because lenders must use your bottom line income on your tax returns, this could hurt your chances of approval.

These borrowers are a great example of alternative documentation. They provide bank statements or Profit and Loss Statements rather than tax returns. Again, the lender can’t sell this type of loan to Fannie Mae or Freddie Mac. But, they can keep it on their books and service it themselves.

What Documents Will You Need?

Different lenders may require different documents. Don’t think it’s a one-size-fits-all approach. Ask each lender their specific requirements. In general, you can expect to supply some or all of the following:

  • 12 months’ worth of bank statements – You’ll need to include all pages of each statement to allow the underwriter to look closely at your deposits and withdrawals
  • Letter from your accountant proving your self-employment as well as how long you have been self-employed
  • Investment account statements for the last 12 months if you use investment income to qualify

These documents are a general idea of what you may need. Again, each lender differs in their requirements. Some lenders take bank statements; others may still want to see your tax returns, even if they don’t use them for qualifying.

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Increase Your Compensating Factors

The best way to ensure that you get approved for a low doc loan is to enhance your compensating factors. These are factors the lender doesn’t use for qualifying, but can use as a “back up.” In other words, they make your loan application look less risky. Here are a few good examples:

  • High credit score – Each loan program has a minimum credit score they allow. But, if you have a score that far surpasses that minimum, it could boost your chances of approval. A high credit score usually means financial responsibility. That’s just what the lender wants to see.
  • Excessive reserves – Your loan program may require a specific amount of assets on hand. If you have money beyond that amount, though, they can be your reserves. The lender counts reserves based on the number of mortgage payments the money can cover. If you have 6 – 12 months’ worth of reserves, you may increase your chances of approval.
  • Low debt ratio – Each loan program will also have a maximum debt ratio requirement. If you have a DTI that isn’t even close to that amount, though, it can help. It shows lenders you aren’t in over your head in debt.

Shopping Around for a Low Doc Loan

Something to keep in mind, the low doc loan is a non-qualified loan. That means lenders aren’t restricted on what they charge. This doesn’t mean you pay through the nose in fees. But, you should shop around. We suggest getting quotes from at least three lenders. This way you know what the norm is for this loan type.

Don’t get caught up in comparing the interest rates alone, though. Look at the fees too. What does the lender charge? Are you paying origination fees? What about discount points? These factors should play a role in your decision.

If you plan to stay in the home for a long time, paying for the lower interest rate might make sense. Paying interest over 30 years can really add up, even if it’s only 0.5% higher. If, however, you know you’ll move in the near future, it might not be worth paying for a lower rate. You might be better off taking the lender with the higher interest rate up on his offer. You’ll pay the interest for a shorter amount of time, so paying slightly more won’t cost too much.

You’ll likely have an easy time finding a low doc loan when you prepare yourself. Make sure you shop around and find the best deal. But, the more organized you are, the more likely you are to get approved. Show lenders that you know what they expect and provide it to them. If you can supply them with compensating factors as well, it can increase your chances of approval.

Don’t forget to compare the interest rates and costs of each loan, though. Don’t jump at the first loan because you are excited to get approved. There are many lenders out there today that cater to the self-employed or non-traditional borrower. Find the one that meets your needs the most and secure the mortgage that will set you up for success.

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The Real Reasons to Use an Alternative Documentation Loan

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Documents

You don’t need perfect credit or a W-2 to secure a mortgage. Alternative documentation loans allow some flexibility in qualifying for a mortgage.

Read on to see what options may be available to you.

What is an Alternative Documentation Loan?

The exact definition of an alternative documentation loan depends on the lender. There aren’t any regulations or requirements for this type of lender. It’s not your A-paper or subprime loans. It’s somewhere in between. It’s a straightforward loan with the same benefits as any other loan. The difference is in how you qualify for it.

The Characteristics of an Alt-A Loan

There are many different ways you can get an Alt-A loan. With any Alt-A loan, though, you don’t provide the same documentation as a full documentation loan. In a full doc loan, you would provide:

  • Pay stubs
  • W-2s
  • Tax returns
  • Bank statements
  • Employment verification

In an alternative documentation loan, you won’t provide all of that. You might provide some of it, though. It depends on the program.

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Instead, you’ll provide what they call “limited documentation.” Maybe you have a job that has variable income. You might qualify for the loan based on your assets alone. You’d be a good candidate for this limited documentation loan. Rather than providing W-2s and tax returns, you might just provide your bank statements.

Who Qualifies for an Alternative Documentation Loan?

Every lender has different requirements. There isn’t a blanket policy for every bank. One bank might require a credit score over 680. Another might allow scores as low as 620. It’s impossible to know unless you apply with various lenders.

The real question is who would benefit from this type of loan? Following are the most common borrowers:

  • Self-employed – These borrowers often have inconsistent income or claim a lot of expenses on their tax returns. Qualifying with full documentation probably wouldn’t occur. Even though the borrowers can afford the loan, it doesn’t look that way on paper.
  • Borrowers without a job – Some borrowers have enough assets to afford a mortgage, but don’t have employment. Without employment and a constant cash flow, it could be hard to secure a new mortgage. Alt-A mortgages can help work around this issue.
  • Borrowers with less than perfect credit –Credit history issues might prevent standard lenders from approving your loan. This might make the Alt-A loan a good solution for you. These lenders make up their own rules and can often work around issues as long as they aren’t housing related.
  • Borrowers that need a high LTV – The more you borrow, the riskier you become. FHA loans do allow LTVS up to 97.5%, but you still need straightforward income and decent credit. Combine either factor with a high LTV and you have a recipe for trouble. Alt-A loans can work around this issue.

Prepare Yourself for Higher Rates

Don’t be alarmed if you pay a higher interest rate for an alternative documentation loan. It’s the tradeoff for more flexible requirements. If you want a lender that requires perfect credit and straightforward income, you can have the low rates. If you need concessions, the lender is going to charge you for it.

This isn’t to say you’ll pay excessive interest rates. It depends on the situation. As with any other loan, shop around! Don’t settle for the first approval you receive. Make sure you comparison shop. This is especially important because you have a unique loan type. You aren’t looking for a Fannie Mae or FHA loan. Each lender will have their own program.

If you think you don’t fall under the “a paper” loans, consider alternative documentation loans. More and more lenders offer them today. As the number of self-employed borrowers increases, the need for this type of lending increases.

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How to Verify Your Source of Funds When Buying a Home

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Buying a home can be exciting and overwhelming at the same time. The house hunting can be fun. You get to look for a home that fits your needs and wants. The mortgage shopping might not be as fun. But it is the most important part.

Before you fall in love with a home, it helps to figure out what you can afford. A big part of this process is how much money you put down on the home. The down payment and the closing costs affect what you can purchase. You must be able to verify your source of funds. If you can’t, you may not be able to use the money as desired.

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Why Lenders Care

First, you might wonder why lenders even care where your funds come from? It’s money, right? The problem is it could be borrowed money. Lenders also worry that the funds may belong to someone else. This could occur if you withdraw the funds from a joint account. If this is the case, you may need approval from the joint account holder. This only occurs if the joint account holder is not on the mortgage. This person must confirm that you have 100% access to the funds and that no repercussions will occur as a result of its use.

As a general rule, the money you use for a down payment or closing costs should be yours for at least 2 months. This means the money is in your checking or savings accounts for that amount of time. Again, it should be in an account solely for the people on the mortgage. However, there are a few other things you must verify. You can’t just obtain money from someone else and put it in your account for a few months. Lenders must still source the funds.

How Lenders Verify the Source of Funds

This is where things get tricky. Many borrowers think the underwriter is just being “picky” when they ask for the numerous docs, but they are just being careful. If the money is yours and not a gift from someone, you will likely provide your last 2 months’ of bank statements. The lender will go over them and see if there are any ‘large deposits.’ This means any deposits that don’t coincide with your regular income. What a lender considers large is rather subjective, though. A few hundred dollars probably won’t matter. But, a few thousand dollars would need an explanation and possibly proof.

If your funds are a gift, you must supply more proof. Lenders need proof of where the money came from and that it was given to you. This can be done with the following:

  • Copy of the original written check
  • Copy of the canceled (deposited) check
  • Copy of the deposit ticket

The donor will also have to write a gift letter stating the money is a gift and no repayment is necessary.

Keep in mind, some loan programs, such as FHA, will require the donor to source the funds as well. They do this by requesting a copy of the donor’s latest bank statement. If there is a large deposit, its source might be questioned. The lender must make sure the funds are not borrowed funds.

A Real Life Example

Let’s look at a real example to put things into perspective.

You plan to purchase a $150,000 home. You are using conventional financing and putting down 10%. This means a down payment of $15,000. Your closing costs will equal $5,000. So you need $20,000 total. You have $10,000 and your parents are gifting the other $10,000. Your lender knows this and will proceed accordingly.

What you can’t do is accept the $10,000 and close on your loan. The lender must source the funds. It’s best if you wait until you have a loan in process to accept the money. This way the underwriter can tell you how to proceed. In many cases, you would do the following:

  • The donor would provide you with a cashier’s check for the money
  • You make a copy of the check and deposit it in your account
  • You make a copy of the deposit ticket
  • Once the check clears, the donor provides the lender with copies of the last 2 months’ bank statements
  • You provide the lender with the copy of the check, deposit ticket, and the last 2 months’ bank statements

Every lender has different requirements regarding gift funds. Always talk to your lender first before accepting funds. If you have already accepted them, make sure you have a paper trail. Document every deposit with as much paperwork as you can. This helps the lender know the funds are not borrowed and are a valid gift.

Gift funds are widely accepted and a great way to buy a home. But, you must follow the rules carefully. How you verify the source of funds is crucial. One missed step and you could have issues with your down payment. The good news is many loan programs allow down payment assistance. Conventional loans allow gift funds for the entire down payment if you put down at least 20%. If the down payment is less than that, you have to contribute some of your own funds. For government-sponsored loans, such as FHA, the entire 3.5% down payment may be a gift. The exception to the rule, however, is if you have a credit score lower than 620. In this case, 3.5% of the funds must be yours. This means a donor can help you with the closing costs.

The bottom line is you must source your funds. We suggest talking to your lender before making any moves. This way you know you are doing it right. It is much harder to go back and undo what you did than to wait and see how to proceed. In the end, you could end up with some great help in the purchase of your new home.

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