Mortgage and Portfolio Loan Guide

Jumbo Loans for Bad Credit

When seeking home financing with bad credit, your options may be limited. When seeking Jumbo Loans for bad credit, your options might even be more limited, but options are available.

Whether the low credit is due to recent foreclosure/bankruptcy/short sale or just recent collections, this post will tell you everything you need to know about how to get jumbo loans when you have bad credit.

What to Expect When Seeking Jumbo Loans for Bad Credit

In many cases, these loans can be done with as low as 500 credit score. These loans are typically referred to as “portfolio loans“.

When credit score is low, the lender is going to want to see strong compensating factors in order to give careful consideration on whether or not the loan can be funded.

Compensating factors that are helpful for approval if you do have bad credit:

  • Strong equity (or down payment). Although portfolio loans will allow 10% down payment (or 10% equity), typically that is if you have at least 660 credit and at least 2 years since major credit event like bankruptcy/foreclosure/short sale. The lower the credit, the higher the down payment. Example, if you have 500, it is likely you’ll need at least 25-30% down payment.
  • Strong liquid reserves. Lenders love to see that you have plenty of cash reserves or liquid reserves (401K, IRA, etc.) after it’s all said and done. It makes them feel comfortable knowing that if you were to fall on hard times, you have the means to still cover your mortgage and living expenses. Typically showing 6 months worth of reserves is a good sign.
  • Strong history with employer. Stability and consistency of income/employment is important. If you have been with your employer for 3 years, that factor will strengthen the overall profile. That doesn’t mean you’ll be declined if you don’t have 3 years on the job, but it does help if you do.jumbo loan with low credit
  • Low debt-to-income ratio. If you have bad credit, but a low debt to income ratio, it’s much more simple to demonstrate your ability to repay the mortgage. When calculating debt to income ratio, the lender will factor in your new mortgage payment (including taxes/insurance/HOA dues), and all other liabilities that are shown on your credit report. In addition, they will want to include any other real estate owned and taxes/insurance/HOA dues tied to those properties. The lender will take your monthly debt, divided by your monthly income, and that equals your debt-to-income ratio. Example, if your monthly debt is $5,000 and your monthly income is $15,000, your debt-to-income ratio is 33%. Some lenders will go as high as 55% (with strong compensating factors), but typically they are looking to see 45% or lower.
  • Low payment shock. Your current housing expense will be carefully considered when factoring in your new potential housing expense. It helps to show housing payment history, and not much of an increase when comparing present housing expense with new potential housing expense (unless it is a cash out refinance, and other monthly obligations are being paid off).

Be ready to give a thoughtful explanation as to why your credit is bad.

Portfolio loans are considered case by case, and it helps if you can clearly tell the story of what happened. [more on portfolio loans here]

4 Things You’ll Need To Do When Getting Jumbo Loans For Bad Credit

  1. Be prepared to tell your story. When getting a portfolio loan, the story matters. Take the time to have your facts straight and put it in writing. Help the lender understand exactly what the circumstances were which led to the credit challenge. Explain why these circumstances are isolated, and won’t happen again.
  2. Have all of your documents in order. Just like any other mortgage, when getting a jumbo loan with bad credit, you’ll need to document everything (income/credit/assets). Do not try to cut corners, or ask for exceptions on having all necessary docs. The lender is already taking a risk with lending on low credit. The goal is to minimize the layers of risk involved.
  3. Expect higher rates. When getting a portfolio loan you’re dealing with a different mortgage market than the conventional home financing world. These portfolio loans are designed to be a short term fix for short term circumstances. Once your credit meets normal lending guidelines, you’ll be refinancing into a traditional loan.
  4. Be patient. The underwriting process may take longer than traditional financing in some cases. People are surprised by this because they figure “outside-the-box” lending = quick-and-easy. That’s just not the case. Portfolio loans are carefully underwritten, and fully documented.

Alternative Documentation | Business Owners | Self-Employed

If you are a business owner who shows low net income on tax returns, a bank statement loan may be the best option for you to show your ability to repay the mortgage.

These loans allow self-employed individuals to use their personal or business bank statements to calculate income, and can be done with some low credit scenarios.

When using personal bank statements to qualify you’ll provide 12 months bank statements. Deposits will be averaged over that time frame, and unusual/unverifiable deposits will be excluded from income average.

When using business bank statements to qualify you’ll provide 24 months bank statements. You can only use business bank statements if you are 100% owner of the business. The deposits will be reviewed/averaged, and a “expense factor” will be applied. Typically, the minimum expense factor is 35%. So if you show 100K income, the usable amount is 65K. Your CPA will need to confirm what your expense factor should be.

[more on bank statement loans here]

Keep In Mind

  • Minimum down payment is 10%. The lower the credit, the higher the down payment.
  • Minimum credit score 500
  • Recent bankruptcy, foreclosure, short sale is okay
  • Typically need to show at least 6 months reserves
  • Having strong compensating factors help your likelihood of approval
  • Available on home purchase and refinance
  • Cash out refinance also available on jumbo loans for bad credit

In Summary

Having bad credit does not mean that you have to rent a home while you wait on getting your credit up to normal lending standards. A portfolio loan may be your perfect solution when seeking  jumbo loans for bad credit.

I invite you to reach out.

Get your questions answered.

If I cannot help, I should be able to point you in the right direction at the very least.

 

 

self employed home loans

Mortgage Included in Bankruptcy | Eligibility Answers

There is an interesting guideline with a conventional Fannie Mae mortgage, where the waiting period to obtain new home financing is based on the bankruptcy discharge date, NOT the foreclosure date when mortgage is included in bankruptcy.

This post is for anyone who has ever had a home included in their bankruptcy, and are looking for answers on when they can buy a new home.

Waiting Period – Mortgage Included in Bankruptcy

Let me paint a picture for you to make sure we are on the same page on when this guideline is used.

You filed bankruptcy and listed your home and mortgage(s) tied to the home as included in the bankruptcy.

The bankruptcy was discharged in 2014, but the home that was included in the bankruptcy was not foreclosed until 2017.

Most lenders will tell you that you have to wait 7 years from the foreclosure date before you will be eligible for conventional financing. This is either because the loan officer is unaware or because their company has an overlay that doesn’t allow this guideline. mortgage included in bankruptcy 7 13

But wait a minute, you surrendered that property in the bankruptcy 4 years ago. The guideline states that when including a mortgage/home in a bankruptcy, the waiting period is based on bankruptcy discharge date, NOT the foreclosure date.

This is ONLY on conventional Fannie Mae loan. This guideline does NOT apply on FHA loans.

Who should pay attention

This guideline is for borrowers who vacated the property at the time the bankruptcy was discharged, or around that time. Remember, your intent was to surrender the home as part of the bankruptcy. If you stayed in the home, and were mortgage/rent free for several years, and then expect to buy a house buy using this guideline, there is a good chance the loan will be declined.

The guideline is not designed to help if you did not truly surrender the home when the bankruptcy was discharged.

If you did vacate the property, and got into a rental, paid your rent on time as promised – this guideline is perfect for you.

It is extremely common for lenders to not complete foreclosure proceedings for several years after the home was surrendered in bankruptcy. But this guideline is what saves the day.

Here is the guideline straight from Fannie Mae:

If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the lender obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.

On conventional mortgage loans the waiting period is 4 years from chapter 7 bankruptcy discharge date. Chapter 13 bankruptcy requires 2 years from discharge date or 4 years from the dismissal date.

But if chapter 13 was dismissed, that means the bankruptcy wasn’t completed. This means the debt wasn’t settled per the agreement. So if you foreclose in that scenario, the waiting period will be 7 years.

Where to Look

The guideline above states that the lender must obtain appropriate docs to prove that the mortgage was included in the bankruptcy. What does that mean?

It’s pretty simple actually (if you retained copies of all your bankruptcy docs, not just the discharge).

When filing bankruptcy, there are many schedules (different sections) that are drawn up that identify assets and liabilities that are included and excluded in/from the bankruptcy.

What you are looking for:

  • Schedule A (Real Property – Real estate that is owned by the person filing bankruptcy)
  • Schedule C (Property claimed as exempt from the bankruptcy) – If your property is listed on the schedule C that means you do NOT intend to surrender the home in the bankruptcy
  • Schedule D (Creditors Holding Secured Claims) – This is where you will find the mortgages or other debts that are included in the bankruptcy

Chapter 7 Bankruptcy

With chapter 7 bankruptcy, it is pretty straight forward. If you mortgage was not reaffirmed, your mortgage was surrendered in the bankruptcy along with all of the other debt you listed.

Once the bankruptcy is discharged, your obligations are gone essentially.

Chapter 13 Bankruptcy

With chapter 13 bankruptcy it gets a little tricky. Traditionally, chapter 13 bankruptcy is considered to be a “reorganization of debt”, enabling individuals with regular income to develop a plan to repay all or part of their debts. You and your creditors agree to new terms on your debt per the bankruptcy terms, and you retain the assets associated with that debt. You make your payments per the bankruptcy and once all of your payments have been made, the debt or delinquency is settled.

Some people use chapter 13 bankruptcy as an instrument to actually save their homes from foreclosure. In those cases, typically the mortgage debt that is included in the bankruptcy is any arrearage (past due payments). So the bankruptcy in this case, would act as a tool to help you keep the house while getting caught up on what you owe. In this case, the home would be listed on the Schedule C in the bankruptcy (property claimed as exempt from the bankruptcy).

However, there are many cases where the home and entire mortgage is included in the chapter 13 bankruptcy. If that is the case, the home will NOT be listed on the Schedule C (property claimed as exempt from the bankruptcy), and the home is considered to be surrendered.

Special Note for Chapter 13

When the home is surrendered in chapter 13 bankruptcy, you may need more than the schedule C to convince the underwriter that the home was in fact surrendered in the BK. This (again) is because traditionally chapter 13 is considered reorganization of debt.

Showing additional proof – Each state is different, but if you’re looking to show further evidence of home being surrendered in the bankruptcy, look for a form stating: Chapter 13 Plan and Motions. This will once again declare what is to happen with the real estate, and the debt tied to that real estate upon successful completion of the chapter 13 bankruptcy.

If the home was surrendered, the chapter 13 plan and motions will state it accordingly.

Alternative

If it turns out you do not meet traditional lending standards and guidelines, a portfolio loan may be the alternative solution for you.

A portfolio loan is a mortgage designed for borrowers who don’t qualify for traditional home financing.

Whether the issue is credit related or otherwise, a portfolio loan may be the solution to get you into the home you’re looking to buy while you wait on appropriate time to pass before being eligible for traditional financing.

More on portfolio loans here.

The Most Important Thing

Keep records of all bankruptcy documents.

I cannot tell you how many times I request bankruptcy documents, and all that is provided is proof of discharge.

In order to document everything properly (and make an appropriate lending decision), lenders need all documents associated with the filing. This also includes any schedules, amendments, and discharge of the bankruptcy in question.

If you have had a mortgage included in bankruptcy, and have been told you need to wait to buy a new home based on foreclosure waiting period:

I invite you to reach out.

 

Get your questions answered.

 

If I cannot help, I should be able to point you in the right direction at the very least.

 

 

 

 

self employed home loans

 

What is Manual Underwriting Mortgage?

If you have been told you do not qualify for an FHA or VA loan, but were not given a reason, a manual underwriting mortgage may be your ticket to getting approved.

What is a manual underwriting mortgage?

Traditional mortgage loans have two ways of getting approved: automated underwriting and manual underwriting. When the loan is manually underwritten, the scenario is evaluated with a more fine tooth comb than automated underwrite to ensure the borrower meets required guidelines. A manual underwritten mortgage is often a deal saver if the loan doesn’t receive an automated approval.

Automated approval vs. Manual Approval

what is manual underwriting 2

Mortgage lenders use a “desktop underwriting” system where the mortgage application is imported and then sent to get “automated findings”. Based on the application data (income, credit, assets, property) the desktop underwriter (automated approval) with give:

  • Approve/Eligible
  • Approve/Ineligible
  • Refer/Eligible
  • Refer with caution

Approve/Eligible means based on the application submitted, the borrower appears to meet minimum guidelines for the mortgage they are applying for. If approve/eligible findings are received there is high confidence the loan will be approved assuming the application is correct and all income/credit/asset/property can be verified per requirements on the automated findings. Lenders are not required to share the findings.

Approve/Ineligible findings in my opinion are most commonly found when there are not enough assets for funds to close (down payment, costs, escrows, and reserves) or the length of time employed or housing history is incomplete.

Refer/Eligible means the borrower appears to meet minimum guidelines, but the loan needs to be manually underwritten in order to confirm that is the case.

Refer with caution means there appears to be significant risks with the loan, and the applicant most likely does not meet minimum underwriting standards for the loan they are applying for.

When referring to a “manually underwriting mortgage” the findings with the automated underwrite would be Refer/Eligible.

The problem with manual underwriting mortgage:

Many lenders do not do manual underwriting.

Why?

Because like I mentioned above, with a manual underwrite the loan needs to be underwritten with more of a fine tooth comb which means it slows underwriters down. The guidelines on manually underwritten mortgages are more strict than automated underwritten loans as well.

Many lenders tend to chose a path of least resistance, and only allow automated underwriting to be done. This leaves many borrowers left with a denial letter and no direction as to what to do.

The good news is that there are plenty of lenders who do offer manually underwritten mortgages.

If you have been told that you do not qualify for a mortgage, ask specifically: “What is causing me to not be approved?”

If you can clearly understand the reason for denial, you know what questions to ask if you end up pursuing approval with a different lender.

Perhaps the reason for denial is that your application received Refer/Eligible findings, and the lender you’re working with just doesn’t allow a manual underwrite to be completed.

Manual Downgrade

In some cases, even if the loan received Approve/Eligible findings, the loan has to be “downgraded” and be manually underwritten.

Here is the most comprehensive available list for manual downgrade scenarios:

The Mortgagee (Lender)  must downgrade and manually underwrite any Mortgage that received an Accept recommendation if: 

  • the mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard;
  • additional information, not considered in the Automated Underwriting System (AUS) recommendation affects the overall insurability of the Mortgage;
  • the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts;
  • the date of the Borrower’s bankruptcy discharge as reflected on bankruptcy documents is within two years from the date of case number assignment;
  • the case number assignment date is within three years of the date of the transfer of title through a Pre-Foreclosure Sale (Short Sale);
  • case number assignment date is within three years of the date of the transfer of title through a foreclosure sale;
  • the case number assignment date is within three years of the date of the transfer of title through a Deed-in-Lieu (DIL) of foreclosure;
  • the Mortgage Payment history, for any Mortgage trade line reported on the credit report used to score the application, requires a downgrade as defined in Handbook 4000.1 II.A.4.b.iii (K) – Housing Obligations/Mortgage Payment History;
  • the Borrower has undisclosed mortgage debt that requires a downgrade; or
  • business income shows a greater than 20 percent decline over the analysis period.

 
If a determination is made that the Mortgage must be downgraded to manual underwriting, the Mortgagee must cease its use of the AUS and comply with all requirements for manual underwriting when underwriting a downgraded Mortgage.
 
For additional information see Handbook 4000.1 II.A.4.a.v.–vi. available here

What to expect if your loan is being manually underwritten?

Take a breath and prepare yourself. You’re going to need to be patient because your loan process is going to be slightly more complicated than an automated underwrite.

You’ll need to provide more documentation, and you’ll likely need to provide a few more letters of explanation to your lender.

The bit of extra work that it takes to get a loan approved with a manual underwrite is worth it. The approval is worth the work. The alternative is not doing the work, no approval, and no loan.

What if you’ve tried getting manual underwriting mortgage, and were still denied?

A portfolio loan may be your solution.

what is manual underwriting 3

Portfolio loans are mortgage options that work outside the “normal” lending guidelines. These loans are perfect for borrowers who don’t quite fit within the traditional mortgage requirements.

Examples of when portfolio loans are done:

Ending thoughts…

Just because one lender tells you that you do not qualify for a mortgage, that does not necessarily mean there aren’t any options for you.

Whether you get a manually underwritten mortgage or a portfolio loan, the extra effort is probably worth it. At the very least, you’ll have a 2nd opinion, and have clear understanding of what you do need to accomplish in order to qualify in the future.

 


 

Invite you to reach out to me.

Get your questions answered.

 

 

house loans for bad credit

 

E015: Bank Statement Loan for Self-Employed Borrowers

E015: Bank Statement Loan for Self-Employed Borrowers

 
 
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If you are self-employed or a private contractor, this is the episode you need to hear. I dive into exactly how to get approved for a mortgage with a bank statement loan, and no tax returns are required. Unfortunately, so many times business owners are told they do not qualify for a mortgage because of the way they show their income on their tax returns. With a bank statement loan your income is calculated by averaging your deposits over a 12 or 24 month period. You can use personal bank statements or business bank statements. Everything you need to know about getting a bank statement loan in today’s Mortgage Guide Podcast. Learn more at BalanceProcess.com/bank-statement-loan

Cash Out Refinance with Bad Credit

Tapping into your home’s equity to do a cash out refinance with bad credit may be a great option if you’re looking to consolidate high interest debt or make improvements to your home.

Here you’ll find everything you need to know about how to get approved for such a loan and what to expect when refinancing your home with a cash out or debt consolidation mortgage.

What is a cash out refinance?

When you own a home, typical market conditions provide natural appreciation of your property. This means over time the value of your home increases. As the value increases, you gain more equity in your home.

With a cash out refinance, you can tap into that equity to accomplish your financial or home improvement goals. When you refinance you pay off the existing mortgage loan and get extra cash out to cover other debt you’d like to pay off or make home improvements.

Why would a homeowner do a cash out refinance?

A cash out refinance is done for many reasons. Here are some of the most common scenarios:

  • Consolidate high interest credit card debt
  • Make improvements to the home
  • Pay for children’s college
  • Pay off medical bills or other collections
  • Increase cash reserves for unexpected emergency

Cash out refinancing is available for perfect, good, fair, and bad credit. The main factors that are considered are equity (amount borrowed vs. home value) and income (ability to repay).

A cash out refinance can be done on a primary residence, second home (vacation home), and investment property. The max loan to value ratio will depend on property type, occupancy, and credit score.

Example: if you have perfect credit, and it’s a 2 unit investment property, you may be limited to 70% loan to value. If it’s a primary residence and you have 620 credit score you may be limited to 85% loan to value.

Cash out refinance loans are available for credit as low as 520. Must meet equity and income requirements.

What are the benefits of doing a cash out refinance on your home?

When you consolidate your high interest credit card debt with a cash out refinance there are several incredible things that happen. Paying down your credit cards typically results in higher credit scores.

The credit bureaus (experian, equifax, transunion) score you based on the amount available in comparison to how much you have used. The lower amount you have used compared to the amount of credit available to you will only help your scores in a positive way.debt consolidation mortgage

The interest rates on credit card debt are typically much higher than mortgage rates. AND the interest on credit card debt is NOT tax deductible. The interest you pay on your mortgage IS tax-deductible. Many home owners’ largest tax deduction is their mortgage interest.

By rolling your credit card debt into your mortgage you not only decrease you overall monthly payments, but you also set yourself up for success in terms of tax deductions in many cases.

Take a look at your most recent credit card statement. How much of your payment went toward principal? Not much right?

The tricky thing about credit cards is the minimum payment is manageable, but the minimum payment never gets you anywhere in terms of paying down the principal balance.

By consolidating it into the mortgage, you create a manageable plan to pay off your debt.

Cash out refinance to complete home improvements

Using the equity in your home to improve your home will likely increase the fair market value of your home. Keep in mind, it’s not a dollar for dollar trade-off. Just because you put $20K into new floors and appliances, that doesn’t necessarily increase the value of your home by $20K.refinance mortgage bad credit

Every market is different and some upgrades provide more value increase than others.

The biggest benefit of using your home’s equity to make improvements is it allows you to do the things that you have always intended on doing, but have been unable to save for because life gets in the way.

Improvements like:

  • A new deck/porch
  • Replacing carpet
  • New appliances
  • Roof
  • Improved landscaping
  • and more

What if I have bad credit, can I still do a cash out refinance?

There are several different mortgage options available when looking at getting approved for a cash out refinance. For good credit a conventional loan will probably be the best route to take. For fair to poor credit, an FHA loan will probably be your best route.

If you are a veteran of the US armed forces, and eligible for VA financing, you may be able to do a cash out refinance up to 90% of your home value even if you have credit below 580.

If you do not meet FHA or VA guidelines because you have had a more recent bankruptcy, foreclosure, or short-sale; a portfolio loan will likely be your best option.

Portfolio loans are for scenarios that are more unique and require a “common sense” approval approach. Portfolio loans are less strict than traditional financing, and are intended to be a short-term fix for short-term circumstances. Once you meet traditional lending guidelines you’ll want to refinance out of the portfolio loan.

More on portfolio loans here.

  • Low Credit scores okay
  • Primary residence, vacation home, and investment property
  • Single family home, 2-4 unit, condominium, manufactured homes allowed
  • Recent bankruptcy, foreclosure, short-sale considered

In Summary

There are many benefits to doing a cash out refinance. If you are not sure if you qualify for a cash out refinance whether you have good or bad credit please feel free to reach out.

I’ve been able to help many homeowner’s who have been told by other lenders that they don’t qualify.

I invite you to reach out. 

 

Get your questions answered.

If I cannot help, I should be able to point you in the right direction at the very least.

 

 

self employed home loans

Adam Lesner | NMLS 198818

Michigan, Massachusetts, and Florida. Also offering financing in most states across the US including (but not limited to) Georgia, North Carolina, South Carolina, Alabama, Arizona,

California, Colorado, Delaware, Washington DC, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Ohio, Oklahoma, Oregon, Tennessee, Virginia, Wisconsin.

Do I qualify for a home loan?

Here are all the answers to the question “Do I qualify for a home loan?” The answer to that question is really a four part question regarding you income, credit, assets, and property.

The real questions to be asking are:

  • Does my income qualify me for a mortgage?
  • Does my credit meet mortgage requirements?
  • Are my assets enough to cover the required down payment, closing costs, escrows, and reserves?
  • Does the property I am looking to buy meet lender guidelines and requirements?

In this post I will cover the answers to all of those questions and more. You’ll know exactly what you’re up against when seeking mortgage approval.

Does my income qualify for a home loan?

When applying for a mortgage you have to think like an underwriter.

Regarding income, here is how an underwriter thinks: “does this potential borrower show consistency and stability with their income and employment history?”

In the mortgage world consistency is best demonstrated by providing proof of income for the most recent two year history. If your income is the same or more this year than it was last year, and the year before – that means your income is consistently increasing.

If your income is less last year than it was the year before, that means your income is “declining”. Declining income demonstrates instability, and could potentially cause an issue with approval unless there is a legitimate reason for the declining income.

If showing declining income it helps to show that you’re back on your feet by showing your year to date income is back on track to earn what you did in previous years.

W-2 employee of a company your income will be based on the gross amount on your pay stub. When you are a salary employee it’s very simple.do I qualify for a home loan income

If you are an hourly employee your income is: your wage X average hours per week X 52 / 12.

If you recently received a raise, your income will be based on your most recent raise.

For incentive pay like commission, bonus, overtime – you will need a 2 year history of receiving that income in order to be able to demonstrate consistency/stability.

What if you are self-employed?

See full article on how your income is considered.

The way the lender decides if you’re eligible for a loan is by calculating your income and measuring that against your monthly liabilities (including all items shown on credit, alimony/child support, and all real estate obligations). The underwriter divides your debt into your income (or debt to income ratio).

So if your debt is 4,000/month and your income is 8,000/month, you have a 50% debt-to-income (DTI) ratio.

Most lenders to not like to see debt-to-income ratio above 45%, but in some cases 50% DTI is accepted with strong compensating factors (high asset reserves, low loan to value ratio, etc.).

Does my credit meet mortgage requirements?

Credit = credibility of previous payment history.

You have 1 score from each bureau:

  • Transunion
  • Equifax
  • Experian

For a standard conventional loan, 620 middle credit score is needed. [For other loan types, there are cases where you can go as low as 500 credit score. Just ask.

So if you have scores of 650, 675, 690 – the 675 score is what is used.

Important Note: The scores that the credit bureaus report to mortgage lenders are different than what is reported to consumers who pull consumer reports. The scores that lenders see are almost always lower than what you might pull on CreditKarma.com.

CreditKarma.com is still a great site, and gives you something to start with when trying to get an idea of where you stand.

Aside from actual credit score, here are the things lenders look for on your credit report:

  • On time payment history (or lack thereof – aka late payments)
  • Length of credit established
  • Derogatory marks like collections, charge-offs, judgments, tax liens
  • Major credit events like bankruptcy, foreclosure, short sale

Payment History

It’s crucial to be able to show minimal late payments in the most recent 24 months, especially on housing payment history. Most traditional loans only allow one 30 day late payment in the last 12 months.

But there are alternative loan options for unique credit circumstances.

Length of Established Credit

In many cases there will be a need to show at least 12 months of established credit. However, there are exceptions.

If you have 10-20% down payment, >2 years on the job, and can prove rent history, it may be possible to get approved with less than 12 months credit history.

No Credit Score | No credit Historydo i qualify for a home loan credit

Some people just like to pay cash. Plain and simple. I get it.

For those who have no credit established, and no credit score, you may still qualify for a mortgage by using non-traditional credit approach.

A non-traditional credit report would consist of 3 accounts you pay toward that do NOT show on your traditional credit report.

Examples of non-traditional credit:

  • Rental payments
  • Utility payments (gas, electric, water, landline, home phone, cable)
  • Netflix/HULU
  • Child care
  • School tuition
  • Proof of 12 months savings
  • Gym membership
  • And more

If you have a legitimate (and consistent) 12 month payment history on an account there is a chance it may be considered by the lender in the overall decision to lend.

Derogatory Marks

For minor collections, there are cases where they do not need to be paid off prior to closing on your home loan. Medical collections are given some flexibility as well.

But if you have more than $1,000 in outstanding collections, they will most likely need to be paid prior to closing.

Judgments and tax liens must be paid prior to closing. The lender does not want to have to deal with those obligations potentially becoming a lien on the property/collateral.

These derogatory marks do not necessarily need to be removed from the credit report. Most of the time, the lender just wants legitimate proof or paper trail to confirm the obligation has been paid/satisfied/settled.

Disputed Accounts

When you dispute an account on your credit report because you disagree with the way it is being reported, the credit bureaus immediately disregard that account when calculating your scores.

The result of disputing an account is the credit scores go up. This is because the negative account that is being disputed is not being included in the overall scoring calculation.

For that reason, lenders will typically not allow a loan to proceed until the dispute has been removed, and new credit has been pulled. The logic is: if there is a disputed account, the credit scores are artificially high.

Major Credit Events

On most mortgage loans there is a waiting period between when a person has gone through a major credit event, and when they are eligible for new home financing. Below is a basic summary of what to typically expect as far as waiting periods are concerned. [there are portfolio loans where no waiting period is required]

  • Bankruptcy – Chapter 7
    • FHA – 2 year waiting period
    • Conventional – 4 year waiting period
    • VA – 2 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment if home was included in foreclosure.
  • Bankruptcy – Chapter 13
    • FHA – Must have 12 months on time payments and permission from trustee to enter new mortgage. Must be manually underwritten if less than 2 years.
    • Conventional – 2 year waiting period
    • VA – 1 year waiting period
    • USDA – 1 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Foreclosure
    • FHA – 3 year waiting period
    • Conventional – 7 year waiting period (Unless property that foreclosed was included in bankruptcy. If home was included in BK, waiting period is based on bankruptcy discharge date)
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Short Sale or Deed-in-lieu
    • FHA – 3 year waiting period
    • Conventional – 4 year waiting period
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment

Keep in mind, guidelines change constantly. It would appear a portfolio loan is a good option if you’re back on your feet and don’t yet meet traditional waiting period requirements. More on portfolio loans here.

Do my assets meet home loan requirements?

When evaluating assets the underwriter is reviewing available funds for:

  • Down payment – The amount that you’re coming out of pocket to secure the home.
  • Closing costs – The fees associated with acquiring the home (appraisal, origination, title, closing, recording, etc.)
  • Escrows/prepaids (for taxes and insurance) – The amount set aside to account for taxes and insurance on the property
  • Reserves – The amount of left over available funds

The funds used to qualify must be “seasoned” in your account for 60 days to be eligible funds. Any large deposits that are not seasoned must be explained and sourced. Cash deposits are unacceptable because the source cannot be verified/confirmed.

If you have a property that you are simultaneously selling during the process of buying the new home, the proceeds of the sale of that previous home do not need to be seasoned. You will need to provide proof of sale of the home (purchase and sale agreement) as well as the closing statement prior to closing on the new home.

Reservesdo i qualify for a home loan assets

The logic of reviewing reserves is: if the borrower should unexpectedly fall on hard times, there is enough set aside to cover the mortgage payment for X number of months.

Showing adequate reserves helps strengthen the overall file.

Reserves can be from your traditional bank account, brokerage account, retirement account, etc. You cannot use a non-borrower’s account to show reserves.

Gift Funds 

For most loan types gift funds from family are acceptable. There are scenarios where a non-family member can gift the funds, but every lender is going to have a different interpretation of who is acceptable. For best results, just ask.

Non-Liquid Assets

Cars, RV’s, heavy equipment, beanie babies… are not liquid assets.

Vehicles and other items that can be easily valued, can be considered if sold and properly documented.

If you sell a car in order to qualify for a mortgage be sure to have kelly blue book value on hand, bill of sale, and copy of the check you received when you sold the vehicle. Having a full paper trail helps tremendously.

 

Does the property being financed meet lending guidelines?

There are an infinite number of reasons the property might not meet lender requirements.

I am going to cover some of the most common reasons the property can be the cause of denial with the lender.

Non-Warrantable Condo

When buying a condominium, not only does the borrower’s finances get evaluated, but the homeowners association is also closely reviewed.

The lender will order a “condo questionnaire” in order to evaluate the health of the association.

They’ll look for things like: completion status, investor concentration, pending litigation, and so much more.

More on non-warrantable condos here.

Repairs Neededdo i qualify for a home loan house

If the property is in disrepair, the lender will require completion of repairs prior to closing in most cases. Repairs needed will be determined based on appraiser’s comments in the appraisal report.

The repairs need to be completed by the seller, and a final inspection will be needed prior to closing to confirm completion.

If your repairs are fairly minor, there are many lenders that will allow a “repair escrow”.

A repair escrow is where funds are set aside at closing to cover the cost of the repairs needed. Then the loan closes, and repairs are done after closing. A final inspection is completed when ready.

Typically this only allowed when repairs are no more than $5,000. With a repair escrow, 150% of the estimated repair costs are collected in case of unexpected cost overages.

Example: if the repairs needed are estimated to be $3,000, the actual amount collected for the repair escrow will be $4,500.

If the excess funds aren’t used, the difference will be refunded to the borrower or applied toward the principal balance.

For properties in need of major repair. There are renovation mortgages available on both FHA and conventional.

Unique Property Type

One of the most crucial parts of the appraisal report has to do with the appraiser being able to find recently sold homes that are comparable in size/condition/use that have sold within a reasonable distance.

If there are unique features to the property, the appraiser may have a challenge that cannot be resolved due to market conditions.

Even if there are comparables, some lenders simply do not allow unique property types.

Unique features that could be a challenge:

  • Berm homes
  • Properties that are not suitable for year round occupancy regardless of location
  • Agricultural zoned property
  • Condo hotels
  • More than 20 acres
  • Hobby farms
  • Leaseholds
  • Rustic log cabins
  • Working farms, ranches, or orchards

For unique property type financing, a portfolio loan may be a solution.

In Summary

There are four major pieces of the scenario to consider when asking the question “do I qualify for a home loan”?

Those pieces are: income, credit, assets, and property.

If any of your questions were left unanswered I strongly encourage you to reach out to me below and ask.

If I cannot help, I should be able to point you in the right direction at the very least.

self employed home loans

 

 

Tax Returns and Mortgage Approval

What impact do your tax returns have on buying a house?

It is no secret that the income piece of the mortgage approval process is a major factor. Your ability to repay the mortgage is arguably to MOST important factor that is considered when applying for a home loan.

But how is that income calculated?

What if you are self-employed?

What if you have multiple sources of income?

In this post I am going to cover some of the most important things to consider when it comes to buying a house, and how your income plays such a major role.

How is my income calculated on my mortgage application?

There are many different forms of income, I am going to cover the most common that I run into, and give you general basics on how that income is considered in connection with mortgage appproval.

No matter the scenario, an underwriter is going to want to see consistency, and stability. Proving your ability to repay is the name of the game. If you can demonstrate consistency over most recent 24 months, and stability (same line of work), you are on the right track.

Salary employee (W-2)tax returns mortgage approval

Your annual gross salary divided by 12.

Example: 120,000 annual salary / 12 = 10,000 monthly income

For salaried employees it’s pretty straight forward as long as you have been in the same industry for 2 years. If you used to be an electrical engineer at 100K/year, but now you teach physical education at the elementary school, the underwriter may ask questions regarding stability, and may need to you to be on the job for 6-12 months before reconsidering.

It has to make sense.

Hourly Employee

Base wage is calculated by average number of hours reflected on most recent 30 days pay stubs.

Example: $15/hour X 40 hours per week X 52 / 12 = 2,600/month

If number of hours fluctuate, you’ll need a written verification of income ordered by your lender to be filled out by your boss or human resources department in order to get a better feel for your average number of hours worked

Commission – Bonus – Incentive – Overtime Income

Any fluctuating income is going to require a 24 month history in order to calculate consistency. If the incentive income is declining the underwriter will likely only use the most recent 12 months or year to date amount for the commission/bonus/overtime income in order to be safe.

1099 – Private Contractor Income

When you are a 1099 employee, the company paying you does not deduct things like federal/state income tax from your gross income. For that reason, what you claim on your federal tax returns as your actual income is up in the air until you actually file your tax returns.

There may be deductions that you’re eligible for that will reduce the amount of income you claim on your tax returns.

That reduction in earnings claimed will have an impact on your debt to income ratio when applying for a mortgage.

There is almost always a lack of consistency when considering 1099 income because of the nature of those types of earnings.

Again, in this case the underwriter is going to want to see proof of 24 months of receiving that type of income in order to determine what you actually claim as income after tax write-offs.

Self-Employed Income – Business Owners

Self-employed income is evaluated similar to the way 1099 employee income is reviewed.bank statement loan program

Always best to be able to show two full years of tax returns so that the underwriter can reasonably calculate your income, and get a feel for the health of the business.

For simplicity purposes: your income is the number that is shown on the Adjusted Gross Income line on page 1 of the 1040’s.

Yes there are some deductions that can be added back into the bottom line, but for starters – just find the adjusted gross income to understand basic ballpark.

In addition it is common to have to require a year to date profit and loss statement. This is used to evaluate how the company is doing in comparison to the previous year. It is NOT used to increase your income if you happen to be having a very strong year.

If your business is anything OTHER than LLC or sole proprietorship, you’ll also need to provide two years of business/corporate tax returns along with K-1 if applicable.

Multiple Sources of Income

When seeking approval with 2 jobs, you need to be on job jobs for two full years. Otherwise there is no way to determine the likelihood of you being able to maintain that type of demanding work load.

If the second source of income is NOT from an employer, requirements will vary depending on source of income (disability, social security, pension, rental income, etc.).

Keep in mind – the name of the game is the ability to prove consistency and stability.

What if I filed an extension on my tax returns?

Many business owners take advantage of the opportunity to NOT file their taxes in April like the rest of the country, and instead file an “extension”. The extension allows them to not officially file their taxes until October.

This presents challenges when applying for a mortgage for 2 major reasons:

  1. The income for the year that the extension is filed for is basically disregarded by the underwriter. They will only consider it to confirm the income is in line with previous years. Cannot use it to increase the averages.
  2. When the extension is filed, there is an estimated amount owed for that year’s taxes. When an underwriter sees that estimated amount owed on the extension, they will typically require that amount to be paid prior to closing.

This goes for personal and business tax returns alike.

What if I show low income on my tax returns and I am a business owner?

It is very common for business owners to take full advantage of the legal tax write-offs that are available to them.

The problem with using those write-offs is they often offset the bottom line income claimed significantly.

For business owners in this scenario, who actually have strong income that they can prove – a bank statement loan may be the best solution.

A bank statement loan is a type of portfolio loan that allows business owners to qualify based on the income shown on their bank statements over a 12-24 month period.

This gives the lender the opportunity to evaluate a self-employed borrower’s income with more of a common sense approach.

On a bank statement loan you must be self-employed with the same business for at least two years.

[more on Bank Statement Loans and Portfolio Loans here]

What if I have been self-employed for less than two years?

If you have have been self-employed less than 2 years you may need to look into getting a portfolio loan.

It’s an underwriter call, but without having 2 full years tax returns as self-employed most underwriters find it difficult to agree that stability has been established.

With a portfolio loan you may be able to get around that requirement if:

  • You have been self-employed for at least 1 full year on tax returns
  • You have at least two years of documented previous successful employment in the line of work in which you are self-employed in, or in a related occupation or
  • You have one year of employment and formal education or training in the same line of work

If you’re in business less than one year, that income is not going to be considered as effective.

What if I want to only use my most recent year tax return to qualify?

When having a strong rebounding year after a slow year, it is often asked if a business owner can ONLY use the most recent year tax return to qualify. The logic is to be able to exclude the need to average the low year with the most recent strong year.

There is a conventional product that will allow you to use only the most recent year’s tax returns to qualify.

To be eligible for this product, you must have been in business for at least 5 years, and meet all other credit and asset guidelines. Contact me for questions on this.

In Summary

Tax returns play an extremely important role in the home buying process.

When you file, how you file, and how much income you claim will determine what type of loan will suit you best.

Get your questions answered.

 

I encourage you to reach out.

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

 

 

 

self employed home loans