The Dodd-Frank financial overhaul passed after the Mortgage Meltdown of 2008 requires that all owner-occupied residential real estate financing in the US comes with proof of the borrower’s “ability to repay” the mortgage. These three words have reshaped the lending landscape ever since and have gradually morphed to mean different things. “Ability to repay” used to only mean that taxes, W-2’s & paystubs were acceptable to meet debt-to-income requirements but these days that definition has expanded to also include bank statement loans and “asset depletion” to prove income. Bank statement loans for qualified borrowers are where the lender takes the last 12-24 months of personal or business bank statements and averages the deposits to calculate income. Sometimes the lender deducts an expense factor before calculating qualifying income but most of the time they simply average the deposits and then no taxes or W-2’s are required for the borrower. Asset Depletion is where the borrower has a large sum of money on deposit with an institution but does not have much in the way of other verifiable income. In this case, a certain percentage of the borrower’s deposits are taken into account and considered annual income that is then used to qualify for the loan. Recently these programs are allowing equity from a pending sale to also count as a qualifying asset as long as those monies are then deposited to a bank or investment house upon closing of the sale. These two programs are helping folks get mortgages that have not been able to do so since 2008.
What About Stated Income:
Stated income is definitely making a comeback but only for investment property loans due to the Dodd-Frank rules on owner-occupied mortgages. Basically, because non-owner occupied homes (AKA investment properties) can be considered “business purpose” they do not fall under the ability to repay rule which allows lenders to qualify the financing on the property’s cash flow and not the borrower. For example, if a house rents for $2000/mo then the lender will make the loan as long as the property cash flows on paper by 10% – 25%. Put another way, in order to get a “stated income” loan on this property the hypothetical rents must be $2200 – $2500/mo and then the lender does not care what the borrower’s credit or income looks like as long as they make enough of a down payment (usually 25% or more) for the property to safely cash flow. These loans come with higher rates but not terrible and are a great solution for folks who can’t qualify traditionally.
Buying a Home for Parents:
Many people don’t know that Fannie Mae allows qualified borrowers to buy homes for their parents with the same rates and down payments as if the home were “owner occupied”. The only stipulation is that the borrowers prove that the parents cannot afford the payments for the new house on their own. This is a great way to get the best rates with lower down payments of 5 – 10% on conventional loans up to $679,000 with no adjustment for occupancy or other factors. This does require that the borrowers are able to absorb the additional payments into their debt ratios much like a second home designation but other than that it is a pretty easy process where the parents can or cannot be on title depending on personal preferences.
Turkey threw the world a curveball recently. While some investors feel that most of the fluctuating currency issues are specific to Turkey, others worry that similar economic troubles will be seen in other emerging market countries in the future. The response has been a shift from riskier assets such as stocks to relatively safer assets such as bonds, including U.S. mortgage-backed securities which has been positive for mortgage rates lately. Please call for an up to the minute quote. Thanks and hope you enjoy the rest of your summer!
Rob Scheuing President Sherwood Mortgage Group, Inc.
915 Greenwich Drive Thousand Oaks, CA 91360
CA Dept. of Real Estate #01041525 NMLS #302870