Stated-Income

Mortgage Rates Could Enter Period of Volatility Per Experts

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Market projections point to rising interest rates. According to recent data and expert predictions, it could reach the 5 percent tier by the end of next year. Housing inventory is also expected to ease up by 2018. So should you lock now or wait for home prices to relax?

Just this week, mortgage interest rates inched forward as the senate passed its version of the tax bill. Per the recent Primary Mortgage Market Survey® data released by mortgage giant Freddie Mac, the 30-year fixed-rate increased by an average of 0.5 basis point to 3.94 percent. A week ago, 30-year fixed-rate was at 3.90 percent, still lower from 4.13 percent during the same time in 2016.

Meanwhile, the 15-year fixed-rate median percentage rose from 3.30 percent a week prior to 3.36 percent. An increase of 0.5 basis point. This is the same average a year ago.

The five-year adjustable rate also increased by 0.3 basis point from 3.32 percent last week to 3.35 percent – slightly higher compared to 3.17 percent last year.

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Period of volatility

The possibility of an increasing federal borrowing trend was spurred by the Senate’s vote on tax legislation. This in turn is predicted to take mortgage benchmark rates higher.

Possible impediments to this potential increase are global market factors that have significant influence on Fed rates.

“It seemed at the time that mortgage rates were poised to continue rising,” says Sierra Pacific Mortgage branch manager Michael Becher.

“But this week markets have turned their attention elsewhere. Concern about China’s economy, continuing tensions with North Korea, turmoil in the Middle East as a result of Trump declaring Jerusalem the capital of Israel, and a possible U.S. government shutdown have all contributed to a flight to safety trade that has seen Treasury yields and mortgage rates drop,” he adds.

The possibility of the government shutting down and the tax reform bill legislation are elements in the game that will determine how rates will behave in the near future.

Any positive aftermath from these events will most likely cause rates to increase. When the Fed shifts gear next week, mortgage rates could very well enter a period of volatility.

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What does this mean for the home buyer?

There’s a rising trend in interest rates. If you want to play it safe and there are no other reasons holding you back, it might be wise to lock now. However, if your need to move is not urgent and you want to see how the events play out – with the above data projections on inventory in mind, then you could wait a bit more to find properties that will potentially be more affordable in the future. Or, you can choose to get an adjustable-rate mortgage with low initial interest rate and refinance to a fixed-rate later.

The Survey

The Primary Mortgage Market Survey® was established in April 1971 as the foremost source of mortgage trends in the regional and national level. Its data is utilized by both the public and the mortgage industry at large to gauge market conditions and evaluate mortgage loan options.

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Why Do You Have to Scrutinize the Affordability of Your Mortgage?

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Magnifying Lens

You got a call informing you that your bank has finally approved your stated income loan application.

Congratulations! You will finally be able to buy a home of your own.

But before you sign on the dotted line, make sure you have checked on one very important thing – the affordability of your mortgage.

Can you afford your mortgage?

Okay, your lender has told you that your debt-to-income ratio qualifies for a mortgage. The question is, can you truly afford the loan in real life?

When the lender reviews your credit, they won’t be able to see the entirety of your spendings. In it, they will only see bills from your credit card or auto loan and even your student loan. However, they won’t be able to check how much you spend on your grocery and gas, your utilities and other insurances.

Your credit may not be the total reflection of the kind of spending habits you have. It is only you who can truly assess if you will be able to make consistent, full and on-time payments. You have to factor in all the things that may affect the affordability of your home loan.

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The law requires that your affordability is determined.

Your lender is responsible for determining your affordability. This is the law. They have to do so with due diligence by scrutinizing your income and debts.

Not only do they want to make sure that you are willing and able to pay their money back. The truth is they have to do this because if they fail to do so, they may be penalized. Before they will even provide the loan, they will ask you to provide all the necessary documents for them to check your income and debts.

While there are loans that do not require any documents for verification, they are deemed too risky. Stated income loans may be non-conventional but it still requires adequate proof of affordability before it can be originated.

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Rules are rules.

Non-qualified loans do not mean not having any rules to follow. One particular guideline is the Ability to Repay Rules.

With these rules, there is a stronger sense of accountability, both on you and on the lenders part. Gone are the days where you just declare to a lender that you can afford the loan and they take your word for it. You have to show adequate proof that you truly can repay the borrowed money. Stated income lenders will set their requirements, establish that a person can afford a home financing and be accountable for it.

Non-qualified loans like a stated income loan do not work like QMs, where you can sue your lender when you are given an unreasonably higher rate or provided with unattractive terms. You have to understand how your loan works. Moreover, you have to establish that the affordability of your mortgage is well within your means.

Begin shopping for lenders. Make sure you are able to make comparisons between offers. This will help you find a loan that is truly within your budget. Make sure you have all the documentation needed.

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What are the Pros and Cons of Stated Income Loans

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What are the benefits and disadvantages of opting for a stated income loan over a traditional financing option?

 

Most loan and mortgage programs require the borrower to undergo a tedious underwriting process.

These often come with strict lending requirements such as an asset and income verification process which lengthens the loan acquisition timeline (given the lender uses traditional lending tools).

It also leaves out borrowers who earn from unconventional income sources and have a difficult time documenting their salaries.

This is the very same problem faced by self-employed individuals, those who have very high earnings, or those who make money seasonally.

For this reason, stated income loans remain attractive as an alternative financing option for many. It offers a streamlined loan process and saves borrowers the hassle of getting the necessary documentations for the process.

But there’s more to stated income loans than offering fast money. Like any other loan option, there are also setbacks and risks that borrowers would have to consider when looking to get a stated income loan.

Let’s get to the details.

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Why get a stated income loan?

Bypasses the regular job dilemma. The problem with most traditional loans is that they expect all their borrowers to have regular incomes which is just not the case for a significant number of the borrower market.

Paystubs have become the standard basis for evaluating risk so if you’re a freelancer or a businessman, you’re in trouble. For these people, documenting a regular income is not an option. Failure to do so can make you appear as a huge risk to their investments and therefore deny your application.

Not fair. If you’re among the nontraditional income earners in the demographic, a stated income loan which only requires you to disclose your earnings suddenly becomes handy. No need to convince anyone.

You decide your own risk. While traditional loans leave the risk evaluation to banks and lenders who ask: “Can he or she afford it?” borrowers of stated income loans are left to ask for themselves “Can I afford it?” and decide the financing path from there.

You have no need to worry about your DTI ratio being too high or your utilization ratio going overboard.

Fast transactions. Because traditional underwriting process is skipped in stated income loans, stated income loans are generally faster. It’s especially helpful if you are in immediate need of finances.

What are the disadvantages of stated income loans?

High interest. To compensate for the huge risk that your lenders are taking to offer stated income loans, they charge an interest rate higher than traditional loan programs. Remember that a single point difference in interest can sum up to thousands worth of interest payments throughout the life of the loan.

If you don’t need financing so urgently, talk to your lender and see if you can agree to find another way to document your income without resorting to a higher interest loan option.

High potential for default. Traditional loan qualification standards are designed to assess a borrower’s creditworthiness. With a stated income loan, all that safety mechanism is bypassed, thereby leaving you and the lender vulnerable to the real risk at hand.

In some other cases, a real assessment of risk is the only barrier stopping an irresponsible borrower from damaging his or her finances further or from abusing financing programs.

If you are in doubt of your own capacity to measure your own risk, consult a financing professional who can help you crack the numbers and make an informed decision about whether to go ahead or pass financing for now.

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

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Does Adding a Co-Borrower to Your Mortgage Make Sense?

The concept of adding a co-borrower is a common practice in the mortgage industry. It’s a practical move to share the costs of holding a mortgage or help you qualify for a bigger loan that you might not be approved on your own. In the initial or later stages of mortgaging, you can put in another name as a borrower to your loan.

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During the Application

When you ask a spouse, a friend or a family member to sign up on a mortgage with you, you are basically “pooling” all your income, assets and credit history together.

With the ability to repay rule in place, lenders are required to do a capacity check requiring traditional or alternative documentation as in the case of stated income loans. In the course of this verification, they might find that your monthly debts relative to your monthly income, as measured by the DTI ratio, is too high. If your co-borrower has a steady income (and that he/she has a lower debt-to-income ratio), it will help you qualify.

Similarly, you and your co-borrower could add your assets such as cash deposits, stocks and bonds to qualify for a loan with a bigger amount perhaps. Lenders check assets to see if these could support your closing costs, fees, and mortgage payments. There is also a reserve requirement that depends on the type of property you are buying.

To be clear, a co-borrower with a stellar credit will help you qualify and possibly get a lower rate only if you have a fairly good credit record yourself. Lenders will consider the lower of the two credit scores and if your score falls further behind, it won’t help in your application.

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During a Refinance

You can refinance to add a co-borrower to the loan. Just like when applying for a new mortgage, you and your co-borrower go through the verification process anew, income, assets and liabilities and credit history be under review.

Adding a co-borrower to an existing mortgage through a refinance is different from adding him/her to the title deed of your house. Except when he/she is related to you by blood or a spouse, a mortgage co-borrower does not have a security interest in the property although he/she has to pay back the loan with you.

Without a Refinance

You can skip refinancing and add a co-borrower to the mortgage but only to a certain extent. For instance, you add someone to the mortgage to put into writing his/her promise to pay some or all of your mortgage debt.

If your purpose is to add a child, spouse or parent, you are better off adding them to the mortgage deed, as mentioned above. They can be co-owners but not co-borrowers so they won’t have to be held equally responsible for repaying the loan.

Otherwise, you still need to refinance so you can add a co-borrower on top of getting a low rate, taking cash out of your home, shorten or extend your loan term, etc.

Be sure to ask your lender about the implications of getting a co-borrower and the options to remove him/her should there be a falling out as in the case of divorce.

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What is Considered Income by Mortgage Companies

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Income verification is a vital part of the mortgage process, or any loan process, that is. It is necessary to help lenders mitigate risk and determine which applicants have the financial means and capacity to pay for the money they will owe.

Lenders are as diverse as their income and eligibility requirements. What one considers as “income” may not be for another lender. There are various parameters that lenders look for in an income. Let’s take a closer look at these.

Salary

The most common type of income is salary for employed borrowers. You either receive your salary on a weekly, bi-monthly, or monthly basis, at a predetermined amount. Depending on how often you receive payment, the lenders will require you to submit a copy of your pay stubs for at least the past two months. The lender will use your pay stubs to calculate your gross annual income, on top of evaluating your credit report and your DTI or debt-to-income ratio.

Bonuses and Commission

Unlike salary that is fixed in amount, bonuses and commission can also be considered as income by some lenders despite its inconsistent nature. However, it will only qualify if you are able to demonstrate that you have been receiving this form for income for at least two years – and will continue to do so in the future. Because they are not fixed, these numbers will be annualized, meaning the lender will average the amount you receive in a certain period of years and not take the numbers you get per year individually.

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Self-Employment Income

In case of the self-employed, you can use tax returns in place of the pay stubs for income verification. If you are planning to get a mortgage and are currently self-employed, you might want to suspend writing off too many expenses so your tax records will be more reflective of your income. For stated income loans, you can also use bank statements to qualify.

Social Security and Disability Income

An award letter will be warranted by the lender as proof that you are indeed receiving social security and disability fund from the government. You must also be able to prove its receipt through bank statements for 12 months. This will show the lender how much money you are receiving which can then be counted by the lender as income. However, additional documentation must be given to show that you will be receiving said form of income for at least the next three years. This assures the lender the continuity of monetary receipt from which the borrower can get the money to repay the mortgage.

Child Support and Alimony

If you think your income is not sufficient to qualify for a mortgage, you can use your child support and alimony as an additional source of income. To utilize this, you must submit: a) a court-ordered divorce decree or child custody agreement b) bank statements showing receipt of said funds c) proof of how long you will be receiving the income. Like the social security and disability income, you must be able to demonstrate that the income will continue for at least the next three years, which might not be the case if your child is already 17 at the time of application.

What is okay for one lender may not be for the other. However, they are not usually far off. What is universally considered by these lenders are the longevity and consistency of your income. That is why the more consistent your earnings are, and the longer you’ve had the job, the better. But that does not mean it’s impossible to get approved otherwise. Take time to shop around and inquire to find the right match for you.

Stated Income Mortgages – Are They Still Available?

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Stated Income Mortgages – Are They Still Available?
Stated Income Mortgages – Are They Still Available_

Stated income mortgages quickly became a thing of the past after the Housing Crisis of 2008. Lenders were no longer accepting the “smoke and mirrors” type lending where borrowers said they made a certain amount of money, when in reality they did not and could not afford the loan. After that crisis, new loan regulations were put into place and it became much more difficult to get any type of loan, which made stated loans null and void. Today, however, they are making a slow comeback but with a different angle – they are not as easy to obtain in order to ensure that these loans are landing in the hands of the right people – the people that can afford them, but they are available to people that can demonstrate responsible use of their money and that can prove their income in other ways, rather than the standard paystub and W-2.

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Qualified Mortgages

The end of the stated income mortgages came about when Qualified Mortgages became a big deal. QM loans are those that are offered to borrowers that can show without a doubt that they can afford the loan being provided to them. Loans that fall under this category have certain characteristics that show your ability to repay the loan. In general, these loans have a debt-to-income ratio lower than 43%, show adequate assets/reserves, and have a great credit score, which means above 700. In addition, these loans do not have periods of interest only payments; balloon payments; or any type of negative amortization – they are straightforward 15 or 30-year loans with standard amortization. These loans cannot have a term that is longer than 30 years or have upfront costs for the loan that are excessive. These loans were the only mortgages seen on the forefront of the lending industry for a while, but this excluded a large portion of the economy as there are many borrowers that do not fit the standard mold, which is when stated income loans started coming back because “rich” people, those with their own company, and those just starting out in life were left in the lurches when it came to buying a house.

Stated Income does not Mean no Qualifications

Today, stated income does not mean that you do not have to prove that you can afford the loan as it did in the past. Lenders are finding ways to prove this with other methods. For example, if you are self-employed and your tax returns do not show adequate income because of the write-offs you use, standard lending will not enable you to get a loan. However, if you have the income and can prove it with bank statements and excellent credit scores, then you will have an easier time trying to convince a lender that you are worthy of a loan because you show a history of paying your bills on time as well as bank accounts with adequate reserves.

Just how much do you need to qualify for a loan today? Every lender will be different with their requirements. Some lenders will need to see at least 12 months of principal, interest, taxes, and insurance in your bank account in order to qualify you for the loan, while others will want more or less than that. As far as credit scores go, many lenders want you to have a score that is at least 700 or higher in order to qualify for a non-income verified loan. In addition, most lenders will not allow a high loan-to-value ratio on stated income mortgages. Instead, they will need to put down a significant down payment, typically at least 20 percent in order to be considered.

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The Reason for the Change

Many people wonder just why lenders would stick their necks out again after what happened with the housing crisis. Shouldn’t lenders only give loans to those that can prove they have the income to afford them? While in reality this makes sense, it leaves the millions of Americans that were forced to leave their employment and become self-employed without the ability to purchase a home. Since this makes up a large portion of the people that would otherwise be purchasing homes, it could hurt the housing industry in the end. These “little guys” need to get out there and be able to purchase a home and they are making a name for themselves; they just might not show it on paper at the moment. This is especially true for those that are just starting out and write off every expense they can on their tax returns in order to decrease their tax liability so that they can keep their income and pay their bills. Since they do that, lenders look at their tax returns and think they make next to nothing, when they do – it just does not show up on paper. Why should these workers be punished after they are doing the economy a favor by producing products/services and generating an income? This is why stated income mortgages have made a comeback with a slight twist.

Big Banks are the Heroes

The biggest problem seen out in the mortgage industry when it comes to stated income mortgages is who is going to purchase them? The secondary market wants nothing to do with these mortgages as they were a large part of what caused the problems in the first place. This is why you will not see the common lenders providing stated income loans, because they do not hold onto their own portfolio – everything gets sold. Larger, private banks however, are keeping these loans in their own portfolio. These are the lenders you need to seek out if you want to get a stated income loan. There might be a handful of private investors that are willing to take the chance and purchase stated income loans, but for the most part it is the private banks that keep them on hand and manage these loans themselves that provide the most success for the self-employed.

Figure out your Compensating Factors

Before you apply for a stated income mortgage, it is important to look at your entire loan profile. Starting with your credit – do you have excellent credit scores? Is your credit history clean, meaning that you have no late payments within at least the last 12 months? These are things the lender is going to look for as they need to make sure that you are not a credit risk at all. Typically a score below 700 by even one point will render you ineligible for a stated income loan. In addition, you will need to prove your worth with your assets. Verifiable bank statements will need to be provided in order to ensure the bank that you have not only enough to afford the loan on a monthly basis, but that you have backup reserves in the event that something were to go wrong.

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Offer Letter Loans

Another version of stated income mortgages that lenders are now able to offer are the Offer Letter Loans. These loans are perfect for those that are changing jobs (relocating), recent college graduates starting their first job, and those that are going back to work after being laid off for a period of time. Offer letter loans work in a similar fashion to stated income mortgages as the lender is relying on the offer letter provided by the employer to qualify you for the loan. There are no paystub or W-2 requirements in order to qualify. There are some strict criteria that must be met however:

  • There must be an offer letter that is non-negotiable or contingent and it must be signed by both the employer and the applicant
  • The job must be starting within 90 days of the loan closing; this must be proven
  • The loan must be for an owner occupied primary property
  • It must be a single family property (home, condo, or townhome)

In addition, the borrower will have to provide proof of adequate assets. The amount required will depend on the length of time between the loan closing and the date the applicant starts his new job. There should be enough assets to cover the principal, interest, taxes, and insurance for the time period that the applicant will not be working in addition to at least 3 months of reserves in the event that something were to go wrong.

As you can see, stated income mortgages are making a comeback, just in a different format than they were once offered. Lenders still need to make sure that they are not providing loans that they know the borrower cannot afford as the lender could find themselves liable for costs that pertain to the violation of the Unfair Lending Practices set forth by the government. Taking extra precautions by asking for adequate proof of reserves as well as requiring excellent credit scores is just the first step in ensuring that a borrower can afford a loan without difficulty.

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