Friday, November 20, 2009

Six Killers of Home Mortgage Financing

The recent extension of the $8,000 tax credit for first time home buyers and the $6,500 tax credit for home buyers who currently own a home holds promise for a more robust winter housing market than usual. Because more buyers will be entering the market for home financing I thought it beneficial to offer insight into six common pitfalls to securing home financing.

Low Appraisal Value: You’ve found a home you like and your offer has been accepted. The appraisal was done a couple of days ago but the value came in under the contracted sales price. This scenario is not as uncommon as you might think in our topsy-turvy real estate world. If this happens to you, you’ve reached a point where the lender will most likely decline the financing until the purchase price is lowered to meet the appraised value.

Too High Debt to income ratio: All lenders use a “debt to income” calculation to qualify borrowers for home loans. This threshold is different for different lenders but should be a point of interest for anyone seeking home financing. The ratio appears as a “percent” and is derived by adding the monthly payments appearing on the borrower’s credit report including the new house payment (principal, interest taxes, insurance, and private mortgage insurance) and dividing this amount by the total monthly gross income being used to qualify for the loan. If this number exceeds the lender’s threshold (usually between 36% and 45%) the loan will likely be declined.

Change in employment status: Perhaps you have recently changed jobs. It is the same line of work but your new employer now considers you a W-2 employee whereas before you reported your income on a 1099. Or you were a W-2 employee and you now own your own business. In either of these instances most underwriters will require you to provide your most recent two years tax returns demonstrating this type of income in order to qualify for a home loan.

Too many repairs: In today’s housing market a larger number of homes on the market are foreclosure homes and may be in great need of repairs. It the home is in particularly poor condition it may be difficult to find a lender willing to make the purchase loan.

After the appraiser examines the home and prepares the report, many of these deals simply fall apart because of leaky roofs, other water damage, broken windows, faulty HVAC, electrical or plumbing issues. Some of these homes are listed as “cash only” sales. In other words the seller has had other buyers who were refused financing and will not only entertain cash buyers.

Tax Trouble: You work hard every day but when you file your taxes you report a large amount of unreimbursed employee expenses. Any amount you deduct for expenses like these, must be deducted from the income used to qualify you for the loan. I recently had a customer who claimed over $10,000 in unreimbursed auto expenses. She had over $50,000 in total income, but subtracting the unreimbursed expenses left her with too little income to qualify for the loan she wanted.

Several years ago, you had a tax lien, but have since paid that lien. Everything is alright now, right? Not so fast. It is not uncommon for a paid tax lien to still show on your credit report as not paid and unreleased. Because getting this release can take some time, if you’ve had a previous tax lien filed on your home, check now to make sure that it shows as being released on your credit report.

Unclear CAIVRS: Credit Alert Interactive Voice Response System. This system is only used when processing FHA and VA loans, but because more strict conforming guidelines are being enforced requiring larger down payments and more reserves, these types of loans have increased in popularity.

CAIVRS is a government database that has delinquent borrower records from the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), the Department of Education (DOE), the Department of Agriculture (USDA), the Small Business Administration (SBA), the Federal Deposit Insurance Corporation (FDIC), and the Department of Justice (DOJ). Your lender enters information into the CAIVRS system about everyone involved in the real estate transaction; buyer, seller, (or owner if it is a refinance), realtor, appraiser, inspector, etc. Any of these names show up on the CAIVRS list can cause a setback in the progress of your government back loan.