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Ask Quillie 1) STATED INCOME - How Much Is Too Much? 2) Should I be considering an ARM? 3) Why you shouldn't buy mortgage life insurance 4) Income Disclosure For The Self-Employed 5) How Does My Credit Score Affects My Home Purchase "I'm in trouble for a stated loan," said a note from the far reaches of cyberspace. "How much overstating your income is considered fraud?" What's obviously best is to get the numbers right when making a loan application. It's equally obvious that "stated income" mortgages open the vault to temptation. Such no-tell loans ask borrowers what they earn and the borrower then puts down a number. Unlike a typical mortgage application, the lender usually does not verify the figure with tax returns, pay stubs or calls to employers. The term "usually" is important. There are at least two instances when stated-income applications are likely to be verified -- if the loan is one of the lucky few audited when sold to an investor or if the mortgage turns sour and must be foreclosed. Lenders are able to check past tax returns because they typically require borrowers to sign an IRS Form 4506 at closing -- a form that gives a third party the right to look at past tax returns. But what is overstated income? Absolutists will say anything above the applicant's earnings. But do we allow for rounding up -- claiming to earn $100,000 when we actually earn $99,900? Is it okay to claim more income than is shown on past tax returns because of so-called "expected" income? Think of the individual completing med school with a new job in hand who provides a written explanation for underwriters. Alternatively, if you earn that $99,900 you're not earning $110,000 or $150,000. And if you bag groceries in a supermarket you're unlikely to be in the highest tax brackets. Henry Savage, president of PMC Mortgage Corporation in Alexandria, VA, says borrowers should "make sure your stated income meshes with and makes sense with your type of employment." David Reed, a loan officer, defines fraud by borrowers as generally "a willful intent to mislead in order to get a loan they otherwise wouldn't have gotten." In other words the requirement is not a perfect loan application, it's a good faith and verifiable effort to get it right. For those with 1040EZ returns the process of completing a loan application should be quick and easy. The situation is more complicated for those who are self-employed or own a business. For such folks "taxable income" is what remains after deductible expenses -- but the catch is that what is or is not deductible may be debatable. Money magazine used to run a "tax test" where several dozen tax professionals were given model income data and asked to compute the tax. Inevitably each expert came up with a different result for Uncle Sam and sometimes the results differed wildly. So how much overstating is allowed? Purposely inflating income is a huge no no. Enlarging income because a loan officer says it's somehow "okay" is not okay. If you're now in trouble with a stated-income loan, then it's necessary to have an attorney review the mortgage application. It may be perfectly fine if the income claimed can be readily documented. But if that's not the case, then a lender faced with a loss, or an investor auditing a loan, will surely want to know how income claims were justified. The first place they'll look is at the tax returns they're allowed to review with a Form 4506. If we assume that lenders have any sense at all then they plainly recognize that one reason some borrowers turn to stated-income loans is precisely because they represent an opportunity to fudge the numbers. No doubt some lenders reason that overstatements are not a difficulty because home values are generally rising and if there's a wrongful application then hey -- mortgage fraud is a problem for the borrower. But with a growing number of stated income loans on the books, financing with exaggerated numbers could quickly become a lender concern if home values dip, the economy slows and monthly payments don't show up. That's the point at which stated income loans will come home to roost. by Peter G. Miller Published: November 16, 2004 Unlike fixed-rate mortgages, which lock in a rate for the entire life of the loan, ARMs guarantee a certain interest rate for a shorter period of time, ranging from one month to 10 years. A five-year ARM, for example, gives you a fixed rate for the first five years of the loan. But then it becomes a variable rate, adjusting annually in most cases for the next 25 years of the loan. In exchange for the risk that rates will go up in the long run, borrowers get a lower interest rate with ARMs than they would with a 30-year fixed-rate mortgage at least for the short term. Borrowers typically pay about one percentage point less for interest on a five-year ARM than they do for a 30-year fixed loan. Rates for three-year ARMs are even lower, while rates for seven- and 10-year ARMs are slightly higher. Such mortgages are most popular when interest rates tick up. "Anytime the 30-year fixed rate goes over 6 percent, consumers start asking for an alternative product. Double-digit increases in home prices have also made ARMs more attractive. Rather than adjust their expectations to account for higher prices, some buyers turn to ARMs to keep their monthly payments within their budget. Perhaps most importantly, many buyers have realized that there's no good reason to pay more for a 30-year guarantee when you don't think you'll be in the same house for more than 10 years. And indeed, ARMs seem to be most popular among younger buyers. To understand the appeal and the danger of an ARM, consider this scenario, which assumes that the 30-year fixed rate is 6 percent, while the rate on a five-year ARM is 5 percent. For a $250,000 loan, the monthly payment with the ARM would be about $1,340, or about $150 less. But, if after five years interest rates rise to 8 percent – which economists say is not unreasonable to assume – the monthly payment for this loan could jump to $1,676. But for many buyers, particularly first-time buyers, an ARM may in fact be the best choice. After all, what difference does a higher rate make if you plan to move anyway? The average homebuyer moves every seven to 10 years. Chances are you can't answer with absolute certainty how long you plan to stay in your house, but most homebuyers have a pretty good idea whether their current address is a starter home or their dream home. But, whether you are buying a starter home or your dream home call me, Quillie Williams at 678-715-7100 to be your real estate realtor and loan advisor. Saving you TIME and MONEY! By Sarah Max Source: Inman News Features Borrower with 'negative amortization' ARM makes lenders cringe "My loan officer is suggesting that I protect my family by purchasing a life insurance policy that would pay off the mortgage if I die. I am the only breadwinner. Is this a good idea?" Not unless it is an incredible bargain, which is extremely unlikely. The greater likelihood is that it is overpriced. The mortgage is only one of the problems you will leave your family if you die too soon. As the only breadwinner, you have to be concerned with where they will get their bread, medical care, education and much more. Planning for your death is a good idea, but the insurance decision should be based on your family's total needs, not just the mortgage. A term policy is the best way to provide adequate protection covering all your needs. It is possible that you already have enough insurance to cover your family's other needs, and all that is required is enough additional coverage to take care of the mortgage. In that event, take out a term policy large enough to cover the mortgage. It is better than a mortgage insurance policy. Terms policies pay cash, which leaves your family with maximum flexibility. Mortgage life insurance pays off your mortgage, whether your family wants to use the cash that way or not. Furthermore, the coverage of a term policy remains constant during the term, whereas the coverage of a mortgage insurance policy declines as the loan balance is paid down, and disappears completely if you refinance. In addition, the market for term policies is extremely competitive, and you can shop among carriers. When you buy a mortgage life policy through your lender, in contrast, you have no opportunity to shop. The upshot is that the mortgage insurance policy will probably cost more than the term policy. You will be paying more for less coverage. Question: I am self-employed and have a great tax preparer. My consulting business grosses over $100,000 per year and I am able to deduct $70,000 in business expenses. This is great because I am in a low tax bracket but I'm running into trouble refinancing my house. Because my business expenses are so high, the lender doesn't want to approve my loan because my income is so low on paper. I have perfect credit, my loan balance is $160,000 and my property is worth at least $250,000. Don't lenders know that the self-employed are able to write off quite a bit of their income? Answer: Yes, lenders are indeed aware that self-employed borrowers often claim whatever expenses they can in order to minimize their tax burden. But mortgage underwriters also adhere to what I like to call "parallel disclosure". This means you have to be consistent when disclosing your financial status to your mortgage banker and the Internal Revenue Service. You're self-employed. You don't want to pay taxes. And you grossed over $100,000 last year. Fantastic. You're clearly doing well for yourself and the lender should understand that. But now let us jump into the shoes of the IRS examiner. He sees that you have deducted perhaps $10,000 in mortgage interest paid last year. He also sees that you paid perhaps $2,500 is real estate taxes. I haven't seen your tax returns, but I would guess that you were able to deduct a few other expenses not associated with your consulting business. Then the IRS agent sees that you grossed over $100,000 in consulting fees and deducted $70,000 in business expenses. You're telling the IRS that you made a hundred grand last year, and $70,000 was spent to make the hundred grand. That leaves you with $30,000 to live on. $12,500 of that thirty grand paid for real estate taxes and mortgage interest. That leaves you with $17,500 to live on. Not so good from the IRS's eyes. In fact, you're in a very low tax bracket because you can hardly make ends meet on only $17,500. So the IRS gives you a very modest tax bill. After all, you're poor. Yup. I'd say you have a great tax preparer. Let's hope your expenses are well documented. Now let's talk about "parallel disclosure". You can't tell the mortgage underwriter that you make $100,000 per year and tell the IRS agent you made $30,000 in the same year. This is why you're having trouble with the lender. But enough of the lecture. Let me make a couple of suggestions that may help you refinance your house. The first thing to do is see if you can achieve and "Accept Plus" under Freddie Mac's Automated Underwriting (AU) system. The Federal Home Loan Mortgage Corporation, or "Freddie Mac", offers a computerized underwriting system that will enable a lender to render a decision in minutes. Depending on the strength of the file, AU will categorize the application as an "Accept" a "Caution" or an "Accept Plus". An application with an Accept Plus status allows a "stated income" underwriting. This means that your income does not need to be verified. Since you have $90,000 in equity and you say your credit is perfect, you might receive an Accept Plus on the AU system. Be sure to ask your loan officer about this. If that doesn't work, ask your loan officer about another "stated income" program. You may have to pay a slightly higher rate but a good loan officer should be able to run the numbers and ensure that refinancing still makes sense. Published: July 9, 2003 by Henry Savage A credit score is used to assess your credit worthiness based on your credit history and current credit accounts. Three major credit bureaus, Equifax, Experian and Trans Union, each assign a credit score based solely on their data about an individual. Credits - particularly lenders- frequently use these scores to determine whether or not to extend credit. Scores range from 375 to 900 points, but numbers mean little on their own. Scores become useful within the context of a lender’s own cutoff point and underwriting guidelines. In General, you are likely to be considered a better credit risk if you credit score is high, (650 or above), and will usually find obtaining credit on favorable terms quick and easy. Scores under 650 can indicate higher risk for the lender, and additional documentation may be required before a loan is approved. A score below 620 is considered a greater credit risk – but it does not mean obtaining credit is impossible. The process may take longer and terms may be less appealing. Credit scores are influenced by payment history, outstanding debit, credit history, pursuit of new credit and types of credit in use (credit cards, loans etc.) Credit scores will be lower if there are too many or too few accounts, payment delinquencies, excessive inquiries or high debt ratios. A solid history of on-time payments to creditors will most likely result in a good score. To improve your score: · Pay your bills consistently and on time. · Check your credit report and remove any errors. · Keep your debt reasonable. One rule of thumb: for a good credit score, your account balances should be below 75% of your available credit. · Maintain only a reasonable amount of unused credit. It’s good to have a cushion of credit available; but having access to thousands of dollars of debt makes a poorer credit risk. · Avoid too many inquires. Inquires are interpreted as sign that you have been actively seeking credit and may be in the process of overextending yourself. |
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