Dallas Fort Worth Homes and Real Estate for Sale: January 2009

I don't have to say that mortgages have changed dramatically over the last three years.  Anyone that hasn't been living under a rock knows that.  But the most significant change that many people don't realize is that stated income loans have all but vanished (aside from some hard money loans available with astronomical points, fees and rates). 

Up until just recently, there were still some reduced documentation loans available with as little as 10% down, but those are completely gone from the wholesale lending channels (brokers), and i'm not familiar with any retail channels that offer them either.  Basically, lenders would allow borrowers to "state" how much income they made without actually calculating their true income from tax returns.  Usually if the income was in line with the occupation, the loan was generally approved.  While stated income loans were initially created as a way for people to reduce the paperwork load that comes with getting a mortgage, many buyers and lenders abused these programs.  The end result is a massive wave of loan defaults on these loan types that resulted in the elimination of these programs.

So what about self-employed borrowers?  What options do they have?

Before I delve deeper into this issue, I want to clear up one misconception that I hear very often: Self Employed borrowers can't get mortgages anymore.  That's a very general statement that is not true, but self employed borrowers that WRITE OFF A SIGNIFICANT AMOUNT OF THEIR INCOME or who DO NOT REPORT ENOUGH INCOME may not qualify.  Lenders require buyers to have a certain debt-to-income ratio in order to qualify for a mortgage.  That debt-to-income ratio is calculated from the net income, not the gross.  There are some items that can be added back into this calculation (namely DEPRECIATION), but it all depends on the situation.  I recently had a borrower who wrote off a significant amount of income because of a per-diem travel allowance that he deducted because he was traveling to Dallas for work and had to stay in a hotel.  But since he was moving to Dallas, it made sense that he would no longer take that deduction AFTER the move, so the underwriter allowed that deduction to be omitted.  Without that omission, he would never have been able to get a loan. 

Again, every situation is different.  Don't assume anything without calling me directly and discussing your individual situation.

As far as their loan options, self-employed borrowers generally must prove two years of self-employment income in order to be considered for a loan.  Other than that, the qualifications are basically the same as they are for wage earners.  Lenders don't discriminate against self-employed borrowers, they just require proof of income now.   

Regarding income and self-employed deductions, I've seen many people who obviously use rather "liberal" tax accounting methods and write off most or all of their income.  Many of those borrowers didn't worry about qualifying for a loan since stated income loans were readily available over the last several years.  But now, borrowers who have too many write offs may be left with no other option but to borrow money at much higher interest rates.  And furthermore, the IRS is well known for stepping up enforcement during times of economic hardship.  With budget deficits projected to be in the Trillions of dollars for the forseeable future, tax audits are bound to increase.  The IRS has already announced they will be stepping up tax audits in the coming years.   Just google "IRS audits increasing" and you'll see what I'm talking about.  If you're self-employed and use "liberal" tax accounting, you may want to reconsider for these reasons. 

If you're self employed and plan on buying or refinancing a home in the next few years, give me a call so we can discuss your options. 

Ever since it became public knowledge that Fannie Mae was in financial trouble, the agency has implimented "Loan Level Price Adjustments", which are basically add-ons to the rates, based on credit score, LTV ratio, CLTV ratio, loan purpose and also property type. 

On December 29, 2008, Fannie Mae announced they will be raising these adjustments yet again, starting on all loans purchased by the agency after April 1, 2009.  Basically that means that each individual lender will have to decide when to implement these changes so they can make sure they have enough time to complete the sale to Fannie Mae.  In other words, expect most lenders to start requiring these new adjustments on loans originated and locked after the beginning of February.  I'm already getting notices from my lenders, and the earliest date that I've seen so far has been February 2, 2009.

So what will this mean to buyers and those that want to refinance their existing mortgage?  Basically, if you have less than a 700 credit score, you will have to either pay a higher interest rate, or pay more points to get the same rate as someone with a higher credit score.

ONE NOTABLE EXCEPTION: THESE ADJUSTMENTS DO NOT APPLY TO 15 YEAR LOAN TERMS OR TO GOVERNMENT LOANS, SUCH AS FHA AND USDA! 

The adjustments are quoted based on the YIELD, not the RATE, and the yield on different rates adjusts quite frequently.  So in terms of the net effect to consumers, I'm going to express this in terms of net cost to consumers based on points for a $100,000 loan amount. 

So in other words, a borrower with a credit score of 645 and an LTV of 95% will pay an additional $4,500 in points on a $200,000 loan amount IF they want to get the same rate as someone with a 720+ credit score.  If they DON'T want to pay these points, then they will have to settle for a rate that's approximately .5% to .75% higher, depending on how much yield it takes to absorb the price adjustment on any given day.  You will have to contact a mortgage professional to get an exact rate quote on the rate adjustments since yields change every day and there's no preset formula for determining the increase in rate.  It all depends on the specific yield on any given day with each lender. 

So the bottom line is that it's going to become MUCH MORE EXPENSIVE to obtain a Conventional Loan with less than perfect credit. 

And FYI, most lenders that advertise those low rates don't tell you about these adjustments in their advertising.  The little star (*) that says "Additional fees and restrictions may apply" is referring to these.  This EXPLAINS WHY IT IS PHYSICALLY IMPOSSIBLE TO QUOTE INTEREST RATES WITHOUT KNOWING THE CREDIT SCORE AND LOAN TO VALUE RATIO!!!  I CAN'T STRESS THIS PART ENOUGH!  IF YOU'RE GETTING RATE QUOTES FROM LENDERS AND THEY AREN'T ASKING THESE QUESTIONS OR LOOKING AT A TRIPLE MERGED CREDIT REPORT, YOU CAN TOSS THAT RATE QUOTE OUT THE WINDOW!

And IN ADDITION to these adjustments, there are CUMULITIVE ADJUSTMENTS that apply to the following transactions:

• Cash Out Refinance Transactions
• Two Unit Properties
• Subordinate financing (two liens)
• Interest Only Mortgages
• Condominiums and Coooperative Properties

The adjustments for cash out refinances and subordinate financing are based on credit score and LTV, whereas the adjustments for two unit properties, condos and interest only mortgages are based solely on LTV.

So what about government loans, such as FHA and VA?  They don't have any specific loan level price adjustments, BUT VIRTUALLY EVERY LENDER IS IMPOSING ADDITIONAL RATE ADJUSTMENTS FOR CREDIT SCORES BELOW 620.  And those adjustments are significant for loans with credit scores under 580. 

The bottom line is that it's getting more expensive to obtain a loan if you have less than a stellar credit score.  For the purposes of Conventional loans, "stellar" means 700 and above. 

The bar has been raised yet again.  And this trend may continue until the losses on lending have reached a bottom.  It's anyone's guess as to when this will happen.  For now, consumers need to start optimizing their credit score well in advance of applying for a loan.  Failure to do so can cost thousands of dollars in additional points or potentially tens of thousands of dollars in additional interest charges over the life of the loan. 

This is a quickie, but a very important question that comes up quite often:  How much does a $1000 increase (or decrease) in the loan amount change the monthly payment on a mortgage?  Not that much, actually. 

Why is this question important in the first place?  Buyers and realtors often negotiate contracts in the evenings and the weekends, or at times when the loan officer may not be available, and many buyers panic when they hear the seller countered their offer by a thousand or two thousand dollars thinking this will astronomically affect their payment.  Also, many buyers are under the false impression that adding a few thousand dollars to their down payment will have a substantial effect on their monthly payment.

The truth is usually pretty shocking to most people.  In every case, the difference in monthly payment is under $10 per month (actually way under, in most cases).

The amount of the payment difference per $1000 depends on two main factors: The interest rate and especially the LOAN TERM. 

Here are some examples:

On a 30 YEAR LOAN at 5% INTEREST, a $1000 increase in the loan amount will only increase the payment by $5.37 per month.  Not that much at all.   

On a 30 YEAR LOAN at 6% INTEREST, a $1000 increase in the loan amount only adds $6.00 to the monthly payment.  

On a 15 YEAR LOAN at 5% INTEREST, a $1000 increase only adds $7.91 to the monthly payment.  And at 6% INTEREST, it adds $8.44 per month. 

And likewise, lowering the loan amount by $1000 will result in a savings equal to these amounts as well. 

Yes, it's true this can add up to alot of money over time, but most people will not live in one home for a full 30 years (or keep the same loan, for that matter).  The fact that the difference in payment is so small per month is pretty amazing to many people.  

This is also one big reason why I suggest to buyers that they should consider keeping some money in the bank rather than putting every penny they have saved towards down payment.  Texas does not allow home equity over 80% of value to be cashed out of a homestead, so if you put less than 20% down, you will not see that money again until you sell the house.  

Of course, there are situations where it makes sense to put more money down.  The difference in rate and PMI between a 3% down and 5% down Conventional loan is pretty substantial, for example.

I'm referring more to people who insist on putting all of their money down to lower their payment.  For example, I had some buyers come in this week who had around $10,000 saved.  The minimum down payment for the home they were buying was around $3,500 ($100,000 FHA loan), but they insisted on putting down the whole $10,000 because they were under the impression it would significantly lower their payment.  Once I explained to them that the extra $6,500 would only lower their payment by around $35 per month, they opted to hold on to that extra money instead.  That was probably a wise decision.  It's not unrealistic to expect to spend a few thousand dollars on various items for a new home (furniture, repairs, movers, utility deposits, appliances, etc), so having some reserves after closing is very important to avoid a financial hardship.  It's never a smart decision for a new homeowner to use all of their savings for down payment.  There's just way too much risk that they will default or at least incur some tough financial times.  Don't let the happy emotions of buying a home overshadow good financial common sense.  That's a mistake that I see way too many people make, especially first time homebuyers.