Danny Salas

Archive for July, 2009

Home Loan Documentation Since The Mortgage Credit Crisis

Stated Income…What’s That?

The days of Stated Income (where you state your income on an application and do not provide any tax returns, paystubs, etc.) are gone.  This article will give insight as to what lending insitutions expect and need, as documentation, in order to be able to sell the loan in the secondary market (GSE’s like Fannie Mae and Freddie Mac).

The (Not So) Good ‘Ole Days

Since the early 1990’s, lending institutions felt as though they could sell real estate loans, in the secondary market, as long as values continued to climb, and there was a world-wide appetite for these loans.   Why should clients have to provide more and more documentation?  It’s fair to say that it eventually got so bad that the least documentation in the file, the easier is was to package the loan and still “sell” it, for a profit.

Then…The Well Went Dry

After the meltdown of the lending industry, it became apparent that documenting everything was going to take precedence.  Here is the outcome:

Think in “Two’s”

Two Paystubs – Lenders want to document a full month’s income.  Generally, employees are paid either every other week, or twice a month.  Therefore, if you’re paid weekly, the bank will want to see four paystubs.  Bare in mind that if you have a long escrow period, you will have to continue to update these paystubs, throughout the escrow time period.

Two Bank Statements - Lenders will want to be certain that the funds being used in the transaction, are actually, the borrowers’ funds.  So, funds just can’t show up, at the last minute, or even show a significant deposit into a borrower’s account without tracing exactly where the funds came from.  Therefore, it will be required that a borrower provide two monthly bank statements showing no significant deposits (that cannot be documented).  This satisfies the lenders’ desire to “season” the funds.  401(k)’s generally come out in quarterly statements.  Therefore the most recent quarterly statement would be acceptable.  Same as investment accounts, or any stock portfolios…they generally have quarterly statements, however, if they do not, than two months would be required.  Make certain that if your statements indicated, “Page 5 of 5,” that you provide all five pages.  Even if page five is your reconcilliation page, banks will want all five pages.

Two W-2’s & Two 1040’s - The lender will want to document two solid years of employment, in the same line of work.  There are exceptions to this rule, for example if one was in college, or schooling, and can document training for the desired field.  However, for the most part, two years’ W-2’s will show the pay structure and history of the borrower.  Some lenders may indicate that 1040 Federal Tax Returns are not required.  Be weary of these lenders, as almost ALL lenders are currently processing a form called a 4506-T form.  It enables the lender to verify that the income information that was provided to the lender IS IN FACT WHAT WAS FILED WITH THE IRS.  So, make sure you’re not suprised, at the close of your escrow, when the borrower cannot fund their loan because they filed 2106 expenses on their 1040 tax returns, thereby, lowering their taxable income (what can be used for qualifying to purchase a home).

Two Years’ Residence History – this is self explanatory

Other Items of Importance (on a case by case basis)

Self Employed Borrowers

SE Borrowers may have to submit K-1’s.  Corporate tax returns will be required for any borrower whose corporation is owned 25% or more, by that borrower.

Occasionally, a signed  Year-to-Date Profit & Loss might be requested from an underwriter, or a copy of two years of a business license (to document two years in the same line of work).

Twelve months’ cancelled checks (front & back) for any liability that a business pays, as opposed to the borrower’s own, personal checking account, can be used to offset any payment obligations that could effect that borrower qualifying for their loan.  If the business pays an auto payment, and it’s supported by cancelled checks, than the company is already writing off that payment and therefore, the borrower should not have to be hit with that monthly payment, also, to qualify.

Be prepared to write letters of explanation.  In a world where underwriters are being deligient to protect their positions and lending institutions, everyone needs to be prepared to dot their “i’s” and cross their “t’s.”

Retirees

Award Letters or 1099’s from the outfit paying the compensation detail how much income is paid out and sometimes for what period of time the borrower may be receiving the income.  Again, 1040 Federal Tax Returns are another source for taxable retired income.

A perfect example is Social Security Compensation.  Each year Social Security provides an award letter to every recipient of those funds.

Investors

1040 Tax Returns will have your Schedule E.  This is the area whereby your “net” income or loss is determined for each real property that you own.  Since the Mortgage Credit Crises, if you do not have two years of schedule E income, than rental income cannot be used to qualify you for your next real estate purchase.  Even if you’re renting your existing primary residence…unless…you can determine 20 to 30% equity in your current residence (by appraisal by an approved appraiser to that particular lender), documentation of the signed rental or lease agreement, and a copy of the deposit check and deposit of the security deposit from the renter who will be renting your home, once you purchase your new home.

HUD-1 on any properties purchased or sold within the last year or so (if a property was on your schedule E for 2008, yet you sold it in December of 2008, you would need a HUD-1 to document the “Net” income or loss … loss.

FANNIE MAE Allows for up to 10 financed 1-4 unit properties to be owned.

FREDDIE MAC Allows for up to 4 financed 1-4 unit properties to be owned.

Divorcees

In the case of a divorce, we would need to document either contractual liabilities or any alimony or child support received by either party.  A full, complete copy of the final FILED and STAMPED decree would be required to determine any other the above concerns.

Generally three months’ bank statements, as opposed to two months, would be requested from a lender.  Documenting the deposit of the said alimony payments or child support payments for proof of receival.  Sometimes, an underwriting for a lender may request 12 months cancelled checks (front & back) to verify payments are being received.

Gift Funds

Gift funds are very important.  As mentioned above, sourcing, or seasoning your down payment and closing cost funds are imperative.  Generally, a good lender will provide you with detailed instructions, as to how to document a gift and transfer the funds properly.

Military Personel

DD-214, or discharge papers, will be required.  Leaving & Earnings Statement for retirees that earn their retirement income from the military.  and off-base housing letters for those still enrolled in military services to our country.

Everyone

…will need to provide proper copies of identity.  Drivers’ Linceses, I.D.’s, Passports, Social Security Cards, are some examples of acceptable forms of I.D.’s.