It's that time of year. April 15th is fast approaching and borrowers are filing their income taxes. Depending on where a borrower is in a transaction, or in a timeline with negotiating a home purchase, the best advice to a buyer who has not yet filed their taxes is to wait.
The reason is that most lenders & investors require IRS form 4506-T as part of final loan approval to verify the borrower's income. Responding to requests for this form can take several weeks at this time of year, which for borrowers who just filed their taxes may delay their loan approval and closing.
So what are loan officers telling clients who haven’t filed their taxes with the IRS? Typically the borrower will qualify on 2014 income, and lenders can obtain 4506 results for 2014 and use that income to qualify. Borrowers should consider filing electronically. Even though it can (will) take several weeks from filing to get the results from the 4506 request, it is much faster than mailing in a return. If a borrower files an extension, they have until October 15th to file their final return. And if a borrower is in escrow and needs income from 2015 to qualify, they need to have filed already, or file immediately, to increase their chance of closing before the end of April.
Everyone should remember that the IRS is not always the speediest of respondents and if that 2015 income is needed for qualifying there is a very good chance the loan may be delayed waiting for those results. It is also important for borrowers to know that when it comes to documentation, every i must be dotted and t crossed. The days of limited or “no doc” loans are gone as investors want all information complete and verified.
Over the decades, mortgage companies have found that non-owner occupied (i.e., rentals, or second homes) are riskier than owner occupied homes: people need a roof over their heads, but not necessarily that 2nd home in the mountains. So the rate or price will be worse for a non-owner loan.
But what happens when a borrower has an owner-occupied loan and decides to rent it out later – does he or she need an entirely new loan? When you sign loan documents for your primary residence there is a certification of occupancy form whereby you affirm that the property will be your primary residence. It includes language regarding loan fraud, loan may be called due and payable, etc., if you affirm your intention to occupy and do not occupy the property. The key is the “intent to occupy.”
But circumstances change, as do housing needs. If you have lived in your home for several years then you have fulfilled the intent to occupy the home and yes, you can move out of your home at a later time and use it as a rental/income property and you do not need to obtain a new non-owner occupied loan.
If you are refinancing your current residence and fully intend to purchase a new home in the near term future then it is strongly advised that your refinance be with a non-owner occupied loan. Some borrowers make the mistake of finding another home when they’re in the middle of refinancing the first home as an owner-occupied home! Obviously lenders cannot have two owner occupied loans going simultaneously, or one on top of the other, with the same client-obviously one is an investment property and must be declared as such. The only exception to this would be if it is evident and a case can be made the new home will be a second or vacation home.
To sum things up: must you live in your home for the duration of your owner-occupied mortgage? No. Must you intend and fulfill the intent to live in your home with an owner-occupied mortgage? Yes. But for how long? There is no exact answer to that question, as it may come down to your ability to argue your intent and/or show a change of circumstance, but plan on at least several months.
As the jumbo loan and refinance market begins to pick up, it’s important to remind consumers of important tips to ensure their credit is and remains in good standing before applying for a mortgage – and what to do if they are turned down for a mortgage.
In general, lenders have more flexibility when qualifying borrowers for a jumbo loan ($417,000 in most areas and $625,000 in some high-priced areas) since mortgages below that threshold must meet stricter standards for conventional loans. Borrowers who are denied a mortgage because they do not meet qualifications must be sent an “adverse action notice” or a statement of credit denial providing the denial reason, which is typically sent within 48 hours after verbal notification.
In 2013, jumbo and conforming loans had 14.5% of all home-purchase loan applications and 22.7% of refinance applications denied compared to 18.7% of home-purchase loans and 39.6% of refinances denied in 2007. The main reasons for a mortgage denial include credit history, high debt-to-income ratio, a reflection of the borrower’s income relative to monthly payment amounts, and insufficient reserves. During the home buying process, borrowers should be made aware that a mortgage denial does not turn up on their credit report, only a credit inquiry, which accounts for 10% of their score.
Another important tip for the consumer is to avoid opening any new credit cards or a car loan as this can raise their debt-to-income ratio for 90 days before applying for a mortgage. Limiting deductions can also help maintain a lower debt to income ratio, as self-employed borrowers may want to limit deductions on the past two years of tax returns to indicate higher annual income. Jumbo borrowers with either a bankruptcy or foreclosure will also need to wait to apply for a mortgage for 4 to 10 years depending on the lender, even if their financial situation has improved.
As always, communication is critical – borrowers need to spend time with a trained loan officer finding out the process and answering the “what if’s”!
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