Why is it harder to get a mortgage if you are self-employed?

By: Paul Defgnin, Mortgage Banker

Being self-employed can come with many perks: flexible hours, long lunch breaks, and always agreeing with your boss. However, when it’s time to buy a home and you’re looking to get a mortgage loan, self-employment can present many challenges in comparison to someone who is salaried. Obtaining a mortgage while being self-employed requires more time, effort, additional documentation and various other challenges including:

Not being able to rely solely on deposits or cash-flows going into business or personal accounts as qualified income

• Needing two years of tax returns
• If you are a partner, a member of a limited company or incorporated in business, you are required to provide various financial documents including, an unaudited year to date profit & loss statement, a balance sheet, and a third-party CPA letter.
• In most cases, you are required to have 2 years of self-employment history in the same business for the income to be considered qualifying income
• If your income fluctuates, it can pose a problem when a lender is considering your ability to repay the loan

Although self-employment presents many obstacles, obtaining a mortgage is still achievable. By educating yourself on the solutions when faced with these challenges, the process can run smoothly and mortgage approval is possible. These solutions include:

• Getting organized and having all your documents in order. 
• Keeping business and personal accounts separate 
• Being prepared to provide additional documents before starting the process including but not limited to 2 years tax returns and other business tax forms
• Ensuring that you have 2 years self-employment history before you apply
• Providing a record that your income is consistent or increasing. If your documents show that your income is declining, be sure to write an explanation and provide documentation if it is an isolated event
• Minimizing how many expenses will affect your net income
• Providing independent verification of your self-employment

Regrettably, sometimes even having all of the necessary documents in order is not enough for lender approval. Frequently lenders and mortgage bankers do not understand how to read self-employment borrowers’ tax returns and will not take the time to learn. The main issue is not proving your income, but it is instead finding an experienced mortgage broker who is able to read your tax returns to assess how much you qualify to borrow.

If you are self-employed and are in need of a reputable Mortgage Banker that understands and has experience working with self-employed borrowers, contact me to get the process started.

Understanding Your HELOC and Repayment: What You Need To Know

By: Eric Gates, President

During the housing boom of the mid 2000’s, Home Equity Lines of Credit (HELOC) were originated at a record pace. A home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house.  In particular, between 2004 and 2008, a significant number of HELOCs with terms of 10 years were created. The draw period for these lines of credit are coming to an end,  evoking conversation on what happens now.

Here is a brief summary of important facts anyone with an existing HELOC should get familiar with:

·      All terms of your HELOC are outlined in the documents you signed when opening your account and should be reviewed to gain familiarity. In particular, read through your HELOC Agreement.  

·      Your interest rate is adjustable and is tied to the prime rate. The prime rate is a commonly used, short-term interest rate used by most banks in the United States. The rate on your HELOC is typically adjusts as the prime rate rises and falls.

·      The prime rate is currently 3.25%. This rate is not static and is subject to change.

·      Rates are expected to rise sometime in the next year or two.

·      All HELOC’s start with a draw period during which the borrower can access the funds on the line of credit.  Typically, the minimum payment during this time frame is interest only, although in some cases it may be a percentage of the outstanding balance.

Which changes can you expect to come to your repayment terms now that your line of credit is amortizing?

·      The initial draw period for HELOCs opened in the 2004-2008 time frame was ten years, in most cases. Some have already moved beyond the draw period and millions more will be doing so within the next few years. Make sure you know when this will happen in your case so you can prepare for it in advance.  DON’T JUST WAIT FOR YOUR HELOC LENDER TO INFORM YOU.

·      At the end of the draw period, the minimum payment requirements change, sometimes drastically, as the HELOC enters the repayment term and funds can no longer be accessed from the Line.  

·      The payments required after the draw period are recalculated so that the balance can be paid off in a specified period of time.  Check your HELOC Agreement to know how long this time period will be.  It is likely to be 5, 10, or 20 years.

·       The shorter that time frame for repayment is, THE MORE YOUR PAYMENT WILL BE GOING UP.  For example, you’d have to pay a lot more each month to pay down the balance in 5 or 10 years than you would to pay if off in 20.

So what should you do?

·         Read your HELOC Agreement and get familiar with the terms.

·         Use an online calculator or ask a Mortgage Banker to determine what your payment will change to based on your balance, interest rate, and the length of the repayment term.

·         Consult with your trusted mortgage advisor to see if there are options to refinance that make sense for you to consider.  Make sure you consult with someone who will give you an honest answer and will be looking out for your best interest, not theirs.

·         If refinancing isn’t an option and the new payment structure is going to be difficult for you to meet, proactively contact your HELOC lender before the adjustment period to see what options they can offer.  While some lenders may work with you to make the repayment terms more affordable, this is not guaranteed.

Navigating changes to your HELOC can be difficult and an experienced Mortgage Banker can help you find the answers to your specific questions. Contact me to discuss your situation and how we can find a solution to meet your needs.

10 Tips to Save for Your First Home

 By: Amy Smith, Mortgage Planner

Saving money is hard!  But just like anything if you try hard enough the payoff is fantastic.  Follow these not easy but rewarding steps to save for your first home….

1.  Start a budget.  Plan your expenses and budget in an amount for savings every month 
2.  Get a travel mug!  Making your coffee at home to take with you can save you $2 or more a day. 
3. Skip the bagel.  Buy your breakfast when you do your grocery shopping and pack it.
4. Along the same lines – pack your lunch.  Savings $7 a day (or more) on lunch out could be a huge savings at the end of the month.  
5. Eat dinner at home.  We are all busy so getting delivery or eating out always seems easier.  If you cut out dinners out at least twice a month you could save $50 to $100 just for those two sacrifices. 
6.  Review your auto insurance plan.  Make sure you aren’t paying too much because you’ve stayed with the same carrier. 
7.  Stop spending needlessly!  Stick with just your needs for one month and see what that leaves at the end of the month.  Stash it away and do it again.  And again. 
8.  Get rewards cards.  Make your spending work for you!  Saving on gas because you shop one place and earning discounts on your purchases another place help to cut costs for the things you have to buy anyway.  
9.   Have the time?  Get a part time job or start consulting (as long as you aren’t planning to claim a loss on your tax returns).  
10.    Have a yard sale.  Sell all of the stuff you don’t need to drag with you to your new home.

Follow these tips and you’re on your way to putting more money away each month towards the home of your dreams. Ready to begin the home buying process? Request a copy of our homebuyers guide or apply online.

Tips for a Successful FHA 203k Renovation Transaction

By Paul Pykosh, Director of Renovation Lending/Senior Mortgage Banker

The FHA 203k rehabilitation mortgage program has grown in popularity as the nation’s housing stock has aged.  It allows a homebuyer to roll in the repair costs into the loan up front.   The 203k loan is perfect for homes that require cosmetic or major rehabilitation in order to make them livable or more desirable. These steps will prepare you for a successful FHA 203k loan transaction: 

1. Get pre-approved with an experienced 203k lender.  First, make sure your loan originator is well-versed in the FHA 203k mortgage, can explain the process in detail to you, and has a history of closing FHA 203k loans.  It is also important to obtain a quality mortgage pre-approval that states the terms of the 203k loan (sale price, approximate rehab costs, approximate final loan amount, interest rate, etc.).   To originate and close a successful 203k loan, the lender needs to have experience with navigating the complexity of the additional paperwork and additional players involved.  If your lender slips and calls the program the 401k loan, you know you are dealing with inexperience from the beginning! 
2. Do some homework!  Take advantage of the HUD Approved 203k Consultants before making an offer on the home.  They offer a preliminary feasibility study that will allow for a rough estimate of the necessary and desired repairs and the costs of those repairs.  Using the consultant for this can help you weed out potential ‘money pit’ properties.   Once you know the scope and cost of the work involved, this can help you structure your initial offer price more favorably.
3. Create your equity through negotiation of the sales price!  The equity in the home is determined greatly by the original ratified contract sale price.  Be careful not to bid too high since the property has to appraise high enough to include the cost of repairs.  The items that can be included for rehabilitation are flexible, but the after-completed appraised value has to validate the repair costs being done.  I have seen buyers end up with less equity because they did not negotiate the sales price low enough.  While it’s easy to get caught up in the whim and appeal of fixer uppers, it’s important to take your emotions out of the deal and treat it as a business transaction. Visit the property a few times and at least once with your contractor and/or Consultant so you know where to start and end the negotiations.   Remember that with FHA, a borrower can negotiate a seller credit for closing costs and pre-paid items up to 6% of the purchase price.
4. Work hard in the beginning of the process to have a smooth closing.  The sooner the consultant, borrower, contractor, and lender get the Specification of Repairs (a list of the specific details of the work to be done and the cost for each part of the work) completed and agreed upon, the sooner the appraisal and the underwriting of the loan can occur.  Be pro-active and help facilitate the process by staying on top of the people involved.
5. Take time to hire a good licensed contractor.    Start with referrals of professionally licensed contractors that have done jobs recently.  Interview a few, get references, and use web sites like Angie’s List to find out about a contractors reputation.  A good contractor is important to the entire loan process, both in the beginning when proper documentation is required and after closing the loan when being on budget and on schedule is vital.  Studies have shown that the lowest priced contractor has the highest number of delays and cost overruns.  The cheapest contractor often leads to the lowest quality work.

These 5 tips should put you in great shape for a successful FHA 203k loan transaction. If you have any questions on the process or to get started on your loan give me a call at (240) 238-2402. You can also check out our mortgage calculators, request a copy of our homebuyers guide or apply online.