Mortgage and Portfolio Loan Guide

5 Odd Things Your Credit Report Doesn’t Show

Good or bad, there are some misconceptions about what information is shown on the credit report.

Before diving into what doesn’t show, let’s take a look at the things that are reported.

When you are looking to buy or refinance a home, your lender will want to take a look at your credit report. Your lender is looking for several specific things.

A few things we do look for on your credit report:

  • Monthly liabilities like car loans, credit cards, student loans, and personal loans. Your monthly liabilities are used to calculate your debt-to-income ratio, and play a big part in your mortgage approval. The ideal situation is to have a DTI (debt-to-income ratio) of 45% or less. So basically you want to have monthly expenses that equal to less than half of what your monthly income is. Note: Student loans sometimes are in deferment status, so no payment is shown. In this case the lender will use a percentage of the balance as a monthly payment, or you can provide a letter from the student loan company stating what your payment will be when you start paying on your loan. With some loan programs you’re able to exclude that liability entirely as long as the loan isbusiness-17965_640 deferred for a certain amount of time (usually at least 12 months).
  • Credit scores. The lender is pulling a trimerge credit report. This means your scores and history are being pulled from all three credit bureaus (experian, equifax, and transunion). The lender will use the middle of the 3 scores. Don’t be surprised if each score is different, that’s common. The reason they are different is because not all creditors report your liabilities to all three bureaus (because it costs time and money to do so). By pulling your credit from all three credit bureaus, we’re able to see as much history as possible to make an educated decision regarding your credibility as a borrower.
  • Bruises. Things like current or past collections, late payments, judgments, tax liens, bankruptcies, foreclosures, and short sales are reported on your credit report. As a lender we take these into consideration when making a decision on your loan. We look for: how long ago did this take place, is there anything still outstanding, have you gotten back on your feet (re-establishing your credit)? Most people think that if they had a bankruptcy or foreclosure in the last year, they can’t buy a house, but with portfolio loans there may be an option if you’re back on your feet.

So those are the basics that we look for on a credit report. But what about the other stuff?

Time and again I go over credit reports with borrowers and it seems like the same questions pop up. “What about ‘X’ liability? I have been paying on that for years, doesn’t that count for something?”

Very valid point. Let’s take a look.
Repair your credit today with Lexington Law

 

5 things that don’t typically show on your credit report:

red 1 brighton mi mortgageYour rent payment history.

You have been renting for two years. Never late. Your landlord loves you, but your credit score is 550. What gives? Doesn’t two years of faithful payments mean anything in this world? Yes, and no. Yes it means something because when you get a mortgage your lender will contact your landlord for verification of on-time payments (verification of rent or VOR). By having a squeaky clean history you simply set yourself up for success.  On the flip side, your faithful payments are not going to be reflected on your credit report because it’s highly unlikely that your landlord will take the time and effort to report your payment history to the credit bureaus. The landlord would actually have to pay to report their information to the bureaus.

red 2 brighton mi mortgageYour income.

“Just take a look at my credit report, you’ll see where I’ve worked and how much I’ve made.” Um, no. Your income is definitely not reported on your credit report. There may be instances where your employer’s address could pop up on your report as a previous address, but the credit bureaus do not know how much you make. Nor should they. The fact of the matter is, your income isn’t a refection of creditworthiness. Income is definitely a factor with a mortgage approval, but not given any weight when it comes to credit score.

red 3 brighton mi mortgageLand contract history.

Some people buy their home with seller financing (commonly called “land contract” in the great state of land contract brighton mi mortgageMichigan). This is a way to purchase a home if you don’t fit within normal lending guidelines. The seller acts as the lender and accepts payments each month. There are some companies that will actually assist the seller with managing this type of private mortgage. The problem is it takes additional time and effort for the seller to go through the process of getting credit reporting set up. I say that there are companies that help with these types of matters, but to be honest, I have never seen land contract payment history on a credit report. Ever. In this case the (new) lender would reach out to the land contract holder to verify the payments have been current, get an official payoff, and verify with the county if the land contract was ever recorded.

red 4 brighton mi mortgageReal time data.

Your credit report doesn’t get updated like your Facebook feed. If you pay down a credit card, and have your credit pulled the next day, it’s probably still going to show your previous balance. If you’re looking to get an increase in your scores, pay down your balances on your credit cards, and wait a couple of weeks. Some experts have a rule of thumb to make the payment, wait until the next bill comes out (showing the new balance), and then have your credit pulled by your lender. To me that makes sense.

red 5 brighton mi mortgageThe sob story (last but not least).

There is always a detailed story behind each derogatory mark on a credit report, big or small. Whether it was your brother’s cell phone bill that you refuse to pay, or the hospital bill that insurance was supposed to cover. There’s always a long explanation. The credit report simply spits out data that they receive from creditors, not much more than that. If you have a situation that you believe is incorrect CALL THE CREDITOR. It’s not just going to “go away”. Talk to 10 different people if you have to, but come to some sort of resolution. If you choose to officially “dispute” the debt, it may create problems on your mortgage approval that you didn’t intend.

What is the weirdest thing you found on your credit report that you had to fight tooth and nail to get removed? Better yet, what was one thing you thought for sure would be on your credit report, but never was added?

Adam Lesner | Brighton, Michigan | Mortgage Loan Officer NMLS 198818

Self-Employed Less Than Two Years Mortgage Solution

Update: 3/6/17

No conforming product currently allows for 1 year tax returns as self-employed if self-employed less than 2 years. On a vary rare basis, some lenders will allow for less than 2 years self-employment. 

It is unclear currently on if 2 year tax returns averaged will be acceptable. 

I will keep this updated as new information comes in. The updated guideline is below. -Adam Lesner

For self-employed Borrowers, the number of years of required tax returns will be based on the number of years the business has been in existence:

  • For businesses operating for five or more (5+) years, one (1) year of business and personal returns will be required.
  • For businesses operating for less than five (5) years, two (2) years of business and personal returns will be required.

(the solution may be a portfolio loan if you have extensive experience in same line of work prior to going self-employed and have at least 1 full year tax return as self-employed)

Is it possible to buy a home if you are a “private contractor” or have been self-employed less than 2 years?

The answer is yes it’s possible, but each situation is unique.

Before we dive into how it’s possible, let’s get on the same page of what the root issue is. Being self-employed less than two years makes it difficult for the lender to make a determination of what your actual income is because there is limited history. Since there is limited history, it’s just as difficult to determine the likelihood of that income to continue in the future.

“Okay, but Adam, I can show you my bank statements with deposits of $10,000/week.”

Right, I get it. You make good money. You have cash money sitting in your bank as a result of your business being profitable. The problem: the lender can’t see how much you had to spend in order to get that kind of return unless you have a profit and loss statement prepared, and show proof of how you’re reporting those expenses to Uncle Sam.  So many, maybe even 80% of the business owners that provide tax returns for me to look at, claim substantial write-offs which offset their income in a way that nearly puts them at a break-even point. The solution: get a bank statement mortgage. There are a few different options when it comes to using bank statements as proof of income. Ask me if I can help with your unique situation by using you bank statements as proof of income.

The good news…

person-110303_1280is that there are lenders out there that will take a look at self-employed borrowers, or even 1099 private contractors from a common sense standpoint. Standard loans backed by Fannie Mae, Freddie Mac, FHA, etc. are not going to be the way to go if you’re self-employed less than two years. The guidelines are strict, and the opportunity to be looked at from a common sense standpoint are extremely limited. Your best bet is to find a lender that offers portfolio financing. This is where they lend their own money, and keep your loan in-house. Keeping your loan in-house means it will not be sold on the secondary market, which means it will not have to meet the strict guidelines of conventional and FHA mortgages. You’ll find portfolio lending with the smaller lenders or credit unions in your local areas. They are the companies that are organically grown within the community, and they tend to have more of an attachment to the area.

2 examples that might make sense to get approved for home financing for less than two years self-employed borrowers:

  1. You have been an IT professional for 5 years. Last year you went from being a W-2 employee to a 1099 employee (private contractor). You’re still working for the same company, but now you are on an annual contract instead of an annual salary. You provide a profit and loss statement showing your income is consistent with how you claimed your tax returns last year. Bam! It makes sense right? Well, most lenders won’t talk to you unless you have 2 years tax returns.
  2. You have been in business for yourself for 5 years running a printer supply store. Last year you had to change the name of your company because of a shady partner that you had to break ties with. You still operate on the same premises. The only thing that changed is the name of your company. Some loan officers will say “Yeah, let’s do this,” just to find out a week before closing that their underwriter isn’t going to approve the loan because there is not a two year history of that business. But, come on, it’s common sense. You’re only going to be looked at from a common sense standpoint in a case like this if you’re working with a lender that offers portfolio loans.

An example that probably won’t fly:

  • You have been a plumber for 10 years. You decide to quit your job and open a pizza parlor. You decide 6 months into it that you want to buy your dream home on the lake. Sorry, it’s going to be impossible to make a determination of what your income is in that short period of time.

How do tax returns impact your mortgage approval? Here is my latest post on that.

 

 



When seeking a portfolio loan, keep these things in mind…check-37583_1280

These are loans that are funded in-house with your particular lender, taking risks the vast majority of lenders aren’t willing to take. You may be required to put 10% down or more. You may only be able to do this type of loan on a primary residence. Your rate might not be the same as what conventional rates are. You may get a chance to be told “Yup, you’re approved”, when everyone else is saying “no”!

I invite you to reach out to me.

portfolio mortgage lendersGet your questions answered. You will not be talking with an intern, or someone who just got their mortgage license. You’ll be talking with me directly.

We can’t help everyone, but we do make every effort to take a common sense approach to get self-employed borrowers approved if it makes sense.

pre approved home loan

 

The Secret to Spending Money Extremely Efficiently

Connecting with Matthew Love has been a great experience. He has brought a fresh perspective to light on the subject of money, and is an all around genuine guy. He was kind enough to share some perspective with me regarding his take on the most effective way to leverage credit, and pay down debt efficiently. Here is what he had to say:

The Power of Collateralization

futer cash

How to Spend Money Efficiently

Have you ever wondered if there is a more efficient way of making purchases? How can it be that we work so hard and never seem to get ahead?  What is it that people do differently to set themselves apart?  How can I get there?  While I don’t believe there is one answer, technique, or product that will create financial success, I do believe there is a process we can follow that will influence our decision-making at a young age to set us apart as we get older and (hopefully) wealthier.

Let’s look at a typical way purchasing a car, or even a student loan, using financing.

I find compoundthe car of my dreams and head to a lending institution, such as a bank, and ask for money.  I realize this might not be the best way to make the purchase, but the smell of a brand new car is un-beatable.  I talk with a banker and they will let me have the money to make the purchase, but in order to use their money, I have to qualify.  After a rigorous background check, housing check, employment check, etc., I finally qualify, but there is a catch.  I have to pay an interest rate THEY determine.  Either way, I want the car, so I make the purchase.  I have a new car by spending other peoples’ money at a cost, and I’m in debt.

Let’s look at what happens when I buy the car with cash.  Instead of buying the car today, I save the monthly payment I would have made to the bank.  Over the course of a few years I have accumulated enough money in an account which is compounding interest.  By paying cash I save paying interest, but it prevents me from earning any interest on the money I just spent.  An economist would say I lost opportunity to earn more because I spent on a depreciating asset.  I killed the forward momentum of the money by spending it!  I never got a chance to realize the full effects of compounding interest.

However, there is a third way. I can use collateral.  If I were to put my savings account up as collateral, I can borrow money at a negotiated interest rate and allow my money to continue the compounding curve! By doing this my full account value can continue to compound, while I pay an interest rate on a smaller amount used to pay off the car; I will have more control, use, and liquidity of my money during my lifetime!  The sooner we can understand how money works, the sooner we can let it work for our advantage.  So, what is your collateral capacity?

paying differently

Matthew Love is a member of Financial Architect Inc.  His work focuses on building wealth for young families.  Working with Matthew, his clients understand the principles of how money really works.

Reach Matthew directly: 847-767-5067 or Matthew@FinancialArch.com

Matthew Love - Financial Architects

financial architects

4 Things to Stop Doing as Soon as You’re Pre-Approved

Isn’t it fun getting a mortgage pre-approval?

You get your credit pulled by the nice guy in a tie at the bank. You tell him about all the glorious money you have to put down on your home. You drink coffee and explain how you make a clean salary, and you hardly ever use your credit cards…

Of course he is happy to print off your crisp, clean pre-approval letter. He connects you with the local real estate genius, and the house hunting begins.

All of the sudden your dog gets sick and you have to pay $900 to keep it alive. “Well sorry ole’ Sparky but I can’t dip into the family savings, let’s use the AMEX to keep the ticker ticking.”

A week later you finally sell your BMX racing bike on craigslist and you’re feeling good with a nice $1,500 deposit into the rainy day fund.

Jimmy from high school gives you a ring and asks you to be a partner in his new business venture, and you accept the offer. C’mon, YOLO.

There was a sweet deal going on at Buy Here, Pay Here, and you finally got the Bronco 4×4 you’ve always wanted.

Uh oh, why is my mortgage guy asking for a paper trail for this stuff? Any why has my credit score tanked? This new business is gonna kill it. What, do they want a blood sample too?

  • Don’t use your credit cards past 30% of you available balance. It’ll change your scores in a way you and your lender won’t like. Sometimes (depending on how long it takes to find a house) your credit may need to be pulled again.
  • No large deposits in your bank account that can’t be easily sourced. (anything other than salary income). Large deposits raise red flags and need to be sourced. What the lender wants to know: “where did it come from?”  “do you have mysterious liabilities we don’t know about that you’re paying back?”
  • Don’t change jobs. Can that wait while you make one of the biggest investments of your life? Consistent income helps strengthen the likelihood of your file being approved.
  • Stop buying stuff. When your lender pulls your credit they are taking into account all of your liabilities, and taking into account what your income is in order to calculate what you’re approved for. If your liabilities increase, there is a chance your pre-approval will decrease. Make sure to ask how tight your ratios are.

Remember, the lender is on your side (believe it or not). We WANT to earn your business. But if you decide to change your financial circumstances after you get pre-approved for a mortgage, just understand that there is going to be some leg work involved to put the pieces of the puzzle together.


E005: 4 Things to STOP After Pre Approval


Tip of the day: When you get pre-approved, provide all your stuff up-front. Tax returns, W-2s, pay stubs, bank statements. This will minimize room for error or misunderstanding.

portfolio mortgage lendersNeed a mortgage pre-approval?

I invite you to reach out to me.

Get the pre-approval you’re looking for from me. You won’t be talking with some newbie. You’ll be talking directly with me, Adam Lesner. If it turns out I can’t help, I’ll usually be able to point you in the right direction at the very least.

pre approved home loan

What “crazy” item did your lender ask you for that seemed absolutely ridiculous?

Be sure to subscribe to my YouTube Channel to get all the best mortgage stuff on a weekly basis. 




 

How Much Home Can You Afford?

What Mortgage Can I Afford?

So let me get this straight; you make $300,000 annually, but you show Uncle Sam that your income is below the poverty line? Sure, no problem, let’s get you that 2nd home on the beach!

Yes that example may be a little extreme. However, this is something that constantly comes up with potential homeowners. In Part 3 of the “keeping your home loan process simple” series; the income piece of the mortgage puzzle is laid out in plain text.

Here is the short of it: Show a recent 2 year consistent income on your tax returns, and prove you’re still receiving that compensation. There you go, no need to keep reading, unless of course your circumstances aren’t quite that simple.

The truth is that even if you’re a salaried employee with a fortune 500 company; in some cases it can still be a challenge to prove your income, and how you’re compensated. This should help you answer the question “what mortgage can I afford”.

Income basics

If you’re employed you can be sure you’ll be asked for the following: Most recent 2 years federal tax returns (all pages), mostBrighton, MI

recent 2 years W-2s (1099’s if applicable), and most recent 30 days worth of pay stubs. You may not always be asked for your tax returns, but it’s best to provide them up front in order to reduce any last minute surprises.

  • Pay stubs should show: the same employers name or entity as the W-2, your name, taxes withheld, and pay rate.
  • If you are using overtime, bonus, or special incentive pay to qualify your employer will need to break down that pay separate from your salary (or hourly) pay. They will also need to confirm in writing how much of that type of income you have received in the last 2 years, and how much you’ve received so far in the present year. This helps the lender to gain an understanding of how consistent, and stable that income has been for you historically.
  • For commission income you’ll need to provide a 2 year history as well. Additionally, your tax returns will get examined in more detail to confirm you didn’t have any employment writeoffs which may offset your income. This can be more common with commission folks.
  • Your lender will order your tax transcripts from the IRS. The purpose is to verify that the IRS shows the same figures as the tax returns you provided.

Self-employed

If you have ownership interest in a company you’ll need to provide at least 2 years most recent federal tax returns (all pages). If you file business tax returns be ready to provide those as well. Your accountant will need to provide a P&L (profit and loss statement) if you happen to be applying for a home loan in the month of April or later in the year. Your P&L states how the company is performing for the year so far. Your P&L gives the lender a picture of how your income (or loss) looks in comparison to previous years. Again, your lender is looking for stability and consistency (or lack there of).

Debt-to-income ratio

michigan mortgage lenderYour monthly liabilities divided by your monthly verifiable income equals your debt-to-income ratio. The liabilities that are considered in this figure are the payments shown on your credit report, property insurance/taxes, alimony/child support owed, and any other legally binding payment. It’s best to do what you can to put yourself in a position to be at or below 43% debt-to-income ratio.Example… Mr. Homeowner has a car loan and credit card; combined payments are $250/month. His mortgage payment including taxes, insurance, and mortgage insurance is $1,100/month. Mr. Homeowner is an engineer with a $60,000/year salary. Mr. Homeowner’s debt-to-income ratio looks like this: 1,350 / 5,000 = .27, or 27%.

Beyond basics

Rental property – 2 years most recent federal tax returns, proof of property taxes and homeowners insurance. Your credit report will show your mortgage payment. If you have your taxes and insurance escrowed (included with the monthly payment) provide your mortgage statement.

Investment income and capital gains – 2 years most recent federal tax returns. Your lender will evaluate consistency, and likelihood of continuance.

Alimony/Child support – You’re probably shocked, but some ex-spouses fail to pay court ordered alimony or child support. For that reason you’ll need to show proof you have been receiving consistent payments for at least 6 months. Also have the full divorce decree ready, and any other updated court documents addressing any changes.

Social security retirement – Current year award letter from social security which states the amount of monthly compensation you’re entitled to. Also a good idea to provide 2 months bank statements showing the deposits received from social security.

Social security permanent disability – If social security has deemed you to be permanently disabled you will have an award letter confirming such compensation. You may also be required to provide a recent letter from a physician confirmingmichigan mortgage lender the state of your condition and the likelihood of the condition to change.

Short term disability – Short term disability will be most likely ineligible to use to qualify for a mortgage because of the uncertainty of continuance.

Pension/retirement – Some pension plans will provide a pay stub and W-2; similar to what you received when you were working. If so, that should be simple enough to verify. If you’re receiving income from an annuity, IRA, or 401K you’ll need to prove it. It would be a good idea to have your most recent quarterly investment statement handy; along with 2 years tax returns. The investment statement you provide will help track your draw (income) history, but also give an indication as to how long that income is likely to continue. The remaining balance should be at least enough to sustain the same draws for 3 years.

VA disability – After being discharged from the armed forces; a veteran may be entitled to disability compensation for injuries sustained while in service. Similar to social security disability; you’ll have an award letter issued to you stating your compensation benefits. The VA has gotten much better in the last few years on requests for a new letter or verification of the status. More on VA and veteran benefits coming soon.

Unemployment – Typically, if unemployment is reported on your tax returns you’ll need to explain in writing why you were receiving unemployment. If you’re in a seasonal line of work like landscaping, and you cannot work in the winter, that would be considered reasonable reason to consider using unemployment income to qualify. If you lost your job and couldn’t find employment for a year; the unemployment compensation you received at that time wouldn’t be considered as stable.

Part time – You must demonstrate a 2 year history receiving consistent hours and pay.

Higher education – You can use the time spent while in college or trade school as part of your 2 year history. The time in higher learning will be considered if you can provide transcripts or a diploma. If school is part of your 2 year history; the only income considered for your new employment will be salary/hourly income in a full time position.

Under the table – Waiters and bartenders tend to not claim all tips received on their tax returns. Any job that you have that is paid under the table will not be considered.

Letters of explanation – When your situation is unique, and you have an opportunity to tell the story, take that opportunity seriously. Be detailed in why it took 4 months to find a job, or why your relocation to another state will not have a negative impact on your income. You’re painting a picture for your lender. You’re helping them put together the puzzle.

Verification of employment – Your lender will reach out to your employer to make sure you actually work there. While your loan is in process, and right before closing your loan your employment status will be verified. This is also an opportunity to have your commission, bonus, or overtime income verified. Things can get sticky if your employer refuses to break down your salary income from other compensation in detail.

What’s the name of the game? If you said consistency coupled with stability; you’d be dead on. Of course the ability to provide relevant documentation to support everything puts the icing on the cake.

A few tips to end with for now…

Your tax returns show unreimbursed business expenses on you schedule A. Take a look at those before you turn your tax returns in to your lender even if you’re not a business owner. A mechanic at a dealership could claim unreimbursed expenses for uniform costs throughout the year. Often times unreimbursed business expenses can cause a last minute issue if they are initially overlooked. Claiming that type of write-off could have an impact on your debt-to-income ratio.

If you have taken out a 401K loan against your employer’s retirement plan there will be an item on your paystub that with address that. Since it’s a loan you’re paying back, that liability would have to be considered in your debt-to-income ratio. If your total vested balance in the 401K exceeds the amount of the loan you have against it; you may be able to exclude that liability from your debt ratio. Have your most recent quarterly statement handy to show your balance.

Having the last pay stub (December 31st pay stub) for the previous two years will often be an easy way to verify how much bonus, commission, and overtime income you received in the previous years.

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