There are plenty of self-employed borrowers who need to borrow money to buy homes. And while the requirements are slightly different than those of W2 employees, loans are being made. Basically the guidelines that Freddie Mac and Fannie Mae mandate for the self-employed borrower are stricter than for the borrower who is an employee. For example, the income that the mortgage industry allows for a self-employed borrower is based on income that has been reported to the IRS and may even be averaged over a two year period; however, the wage earner who receives a raise gets to use that new income immediately to qualify for a mortgage.

For sole proprietors, the income that is used to qualify the borrower must come from the bottom line on Schedule C of the federal tax returns. It is called “Net Profit” and is divided by 12 to come up with the monthly qualifying income. The net profit is what is left after the tax payer deducts all of his expenses from his gross income. The more deductions the taxpayer claims, the lower the net profit and the lower the income tax liability; however, it also reduces the purchasing power of the borrower. Underwriters will typically ask for two years of federal tax returns plus a year-to-date profit and loss statement for the current year. Borrowers who own 25 percent or more of a partnership, LLC or corporation must also provide the partnership returns and/or corporate returns for one to two years.

Depending on the circumstances, an underwriter may not allow cash that sits in a business account of a self-employed borrower to be used towards the down payment or closing costs for a home purchase since the business may be hurt by a depletion of business funds. A CPA letter may be required that states the business will not be hurt by removing funds from a business account.

There may be other requirements, but the point of this reminder is that self-employed borrowers are not being excluded from the American Dream of home ownership – just that there may be a few additional underwriting steps.

There has been a lot of news about flood insurance lately,  So we figured it would be good to take a look at it, and give folks an introductory course in flood insurance.

First, all water damage is not flood damage. Flood insurance covers rising water damaging a building/home and its contents. Damage caused by other factors, weather-related or not, such as wind breaking a window and then rain damaging the interior, is not covered by flood insurance, and instead is covered by other types of insurance.

So far, so good – but an interesting thing happens when one combines condominium living (“legal structure for multiple-unit properties in which owners hold title to an individual residential unit as well as shared interest and ownership of the common building(s) and areas”) with flood insurance. Condo Associations are responsible under the property's bylaws and condo docs to maintain insurance against possible hazards on the common structure(s) and shared areas which may include the entrance and lobby, roof and exterior walls, parking areas, building structure, electrical, HVAC, elevator, and other mechanical systems, and offices, gym, clubhouse, and other shared amenities.

Flood insurance is an important part of that coverage for most condo properties. The determination of flood risk is generally the same for condo buildings as it is for single-family residences (year built, flood zone as shown on the FIRM, occupancy including number of units, type of construction and foundation including first floor design, elevation, location of building fixtures, machinery, and equipment. Since all individual unit owners also own part of the common areas and are members of the Condo HOA, they all pay a part of the flood insurance premium. So yes, that 6th floor resident does need flood insurance.

All lenders require sufficient flood insurance on financed properties located in flood risk zones. When extending a mortgage on an individual condo unit, lenders evaluate the building's and association's insurance coverage, and their risk management does not allow borrowers to be "self-insured".

How Can a Home Buyer Speed-up a Loan?

Jun 3
Category | General

Agents are often asked by new borrowers, “What can I do to help speed up the processing of my loan?” We give them verbal information, but it is helpful to have it in writing, as there are five basic things that impact how fast a loan moves through processing.

The first is responding to disclosures as soon as we give them to you. By not responding it slows down the appraisal ordering process and the lender is going to need those disclosures back right anyway, so send them back! The second issue that comes up periodically is borrowers not filing their tax returns on time. Every borrower, salaried, self-employed, retired, unemployed, whatever, has to have the 4506T (request for tax transcripts) processed. No ifs ands or buts and there is no pushing the IRS.

After your loan is underwritten, usually the underwriter will send out a loan approval along with some “conditions.” These are usually documents that the underwriter needs in order to fully approve your loan. Loan officers tell borrowers to gather the items and send them in quickly. The underwriter has to review the items borrowers send in and that takes time. What the borrowers don't know or understand is that every lender wants all the conditions at once. It is more efficient for everyone involved to have the file looked at as few times as possible. 

Another issue that can hold up processing, and therefore should be avoided, is bringing in money to close from undisclosed accounts. Agents should tell clients early on in the process about accounting for all the money needed for down payment and closing costs. And lastly, if additional money is needed for the down payment, and something has to be sold (stocks or bonds), it will take time. And it all has to be documented (the audit trail): proof you own the asset, proof you sold the asset, where did you put the money after you sold it, consolidating the money into one account to bring the check into escrow (obviously from an account that is documented).

Along with a cornucopia of other choices to make when taking out a mortgage, borrowers are faced with the decision whether or not to pay points, which can go towards either the fee paid to the bank or loan officer who originated the loan or towards buying down the interest rate. The latter, referred to as discount points, are optional and differ from the former in that paying the loan origination fee is unavoidable and the borrower will end up paying it one way or the other.

Discount points, where one point is equal to 1% of the total loan amount, allow borrowers to secure lower interests. They play a prominent role in how a lender’s products are marketed—institutions that advertise the oft-talked about rock-bottom rates usually require borrowers to pay points in order to actually get those kinds of rates.

The most pressing question about points is, of course, if they actually make financial sense. A borrower who takes out a $100,000 loan and pays two points to buy down the rate from 3.5% to 2.99% may sound as though they’ve secured a much better deal, but will end up saving less than $30 a month on payments. Whether or not paying $2000 upfront for that privilege is worth it is an individual decision, of course, but there are times when taking out a mortgage with points isn’t the best financial decision. For some borrowers, that $2000 might be better spent on more immediate needs, such as closing costs or home improvement.

On the other hand, borrowers who plan to stay in their homes for the long term can end up saving tens of thousands of dollars over time by paying points, and there’s certainly something to be said about taking advantage of the extremely low rates currently available. Like any other factor in a mortgage, this is an area where it depends on the individual case, and borrowers would do well to weigh the pros and cons of points for their personal situation.

Why do I need title insurance?

May 27
Category | General

Home buying is on the upswing in many parts of the nation, especially after a harsh winter. And with home buying comes a series of decisions, including where to buy, what kind of house, whether to obtain a loan and what are its terms, and so on. One issue that is often overlooked until the end of the transaction is, “Why do I need title insurance?”

Every buyer and seller in a real estate transaction sees charges for a title insurance policy, but few know what the purpose of the policy is, other than something gets insured. Title policies insure that things are what they are supposed to be: in a purchase the title policy is insuring that you are the rightful owner, that no one can come along later and claim ownership of your property. For lenders the title policy insures that their lien has a certain priority on title and that the only liens against title are documented and disclosed. Title insurance covers any title issues that occur up to the date deeds are recorded when the policy is in effect, it does not cover any issues that occur after the transaction.

Title insurance is not cheap, and claims are rare. But when title insurance companies do pay claims, they are usually very hefty, think tens or hundreds of thousands of dollars. Because of this most of the revenue title insurance companies collect do not go to paying claims, in fact the industry average is that only about 5% of premium revenue goes to claims compared with approximately 70% for auto insurance. Title insurance companies spend the bulk of their premium revenue on loss prevention (research). 

Claims might be paid if the owner of your current home purchased the property eight years ago from a seller who had a lien against the property that was recorded improperly in the county records and that lender stepped forward to collect on your home and possibly force the sale. Forgeries on deeds, unpaid liens, easements improperly recorded or illegal confiscations of title on the property are problems; bank foreclosures and short-sales can complicate things, as can divorce settlements with a recalcitrant spouse, estate issues, easements, or a private party second from a prior seller.

Title policy premiums pay for all the work done by the title company prior to closing so they can insure the buyer/person refinancing obtains clear title. And if the owner discovers later that they do not have clear title, it is the title insurance company’s obligation to pay to correct any claims that may arise.

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