December 16th, 2015 12:17 PM by Gregg Mower
Is it time to bring back loans that people don’t have to fully income or credit qualify for? I believe it is, for no other reason than the current environment cuts out an entire section of the US economy from qualifying for a good loan. The self-employed borrower is being left behind with the current lending rules. The self-employed borrower is a broad reaching term that applies to people that derive their income from partly or entirely from a source that does not require the withholding of taxes. This includes people on commission as a part of their income or their entire income. Another section of potential borrowers that are being left behind are those with less than perfect credit and a high down payment or high equity positions.
The idea of tight underwriting criteria is to keep the foreclosure rate low and to protect potential borrowers from themselves over committing themselves on a mortgage. In the past, lenders were left to their own when determining risks associated with lending money to potential borrowers. It has pretty much always held true that the more money, or equity, a potential borrower has into their home the less likely they will default on their mortgage. Even during the mortgage crisis of 2005-2011 we found that the folks that had a high investment into their homes initially were far less likely to default on their mortgage. After the crisis and with the onset of the Dodd Frank Act that put law into the mortgage risk assessing business we are finding that those folks that have the ability to save from their self-employed jobs are being discriminated against for no other reason than being a true American by using a tax accountant to prepare their taxes and writing off more things than a salaried employee can. This affect can be attributed to the current tax code that allows people write off business related expenses off their income thus reducing the amount of income a lender can use to qualify them. Currently even with a substantial down payment, 20% or more, if the self- employed borrower does not show enough income, net of expenses, they will not be allowed to get a traditional loan under the Dodd Frank laws.
This holds true for those that have a lower than acceptable credit score with a high down payment or equity position. I would contest to say that if a borrower can put a large down payment, 20% or more, they would be less likely to walk away from their mortgage even if the house devalued by 10-20% in the first few years after purchasing. We have seen over time that Real Estate, over the long run will continue to rise at a rate as high, or in most cases, higher than inflation. What this means is that people with large down payments have shown a commitment to the house they are purchasing for the long term. I would contend that even though a potential borrower may have a less than acceptable credit history for a low down payment loan that they should be able to be able to buy a home with a large down payment as they will tend to find ways to make the payments so they don’t lose their investment.
Good news, there is hope for these underserved borrowers out there. We have seen an increase in investors that see loopholes in the law that will allow for these underserved folks to be able to purchase a home. The Dodd Frank law states that “a borrower must show the ability to repay the mortgage”. FNMA and FHLMC (Fannie Mae and Freddie Mac) have interpreted that to mean that all loans securitized by them must explore all income verification sources such as Tax Returns, Pay-stubs, W2s, 1009’s, for all borrowers on the loan. Currently if a borrower fails to provide any one of those documents that support an income needed, the borrower is declined from those loans. The good news is that some new innovative lenders, even with the support from Wall Street hedge funds, are providing loans to those that have similar situations.
The laws state that if you are going to do a qualified mortgage (a home loan for a primary residence) you must show the borrower’s ability to repay that mortgage or verify their income. This can be done by other ways than tax returns, W2s and paystubs, as no two borrowers created equally, everybody is different. So to discriminate on those that don’t show income on their tax returns when they obviously are making income is ridiculous. There are other ways to prove income such as showing regular deposits made to a bank account, or show enough assets that could pay the mortgage off, or simply listening to a borrower on their thoughts of how they plan to repay the loan based on the large down payment they would be making. The market place is coming up with new ideas every day to stay within the law. Alternate income loans are going to be the future for those that cannot show proof of income through traditional sources and we have those Alternate Income Loans Available today.
Alternate income loans vary greatly from source to source that is why here at MAE Capital Mortgage Inc. we take care in making sure our alternate income lenders are everything they say they are. We have several Alternate income sources that will use bank statements for the last 12 to 24 months and average the deposits. The borrowers that can show a good deposit history will tend to get the best alternate income rates on their primary home. All the Alternate Income sources have graduated tiers for credit scores, and down payment or loan to value. What this means is that if you have a large down payment, good deposit history in the bank and you have a good credit score you will get the bests alternate loan rates. The rates will vary to the degree of risk. So on the other hand if you have poor credit you will be required to put a larger down payment or have a larger equity position for a refinance in order to get an alternate income type of loan. The Alternate income loans will require at least a 20% down, or equity position, to obtain this type of loan as the loan is not sold to FNMA FHLMC. There will be plenty of cases where people should not attempt to purchase at this time if their credit is too bad, or they just don’t have a good source of income, or they don’t have the saving to put into purchasing a home.
The Alternate Income loans are designed to fill the gaps where the banks will not lend. Most Alternate Income Borrowers are those that feel that they can make a mortgage payment with the income they are currently making, and have saved a good amount of money, and have good credit. Banks don’t offer these types of loans for a variety of reasons, so you will have to use MAE Capital Mortgage to find the alternate funding sources that will fit your needs. We are licensed by the department of Real Estate and we hold a NMLS license and that makes us uniquely qualified to be able to Broker loans to those funding sources. Our job is to find the best source for your particular situation and match the borrower with lender. We are limited by law on what can be charged on Alternate Money transactions as these loans are on your primary residence, so you know you will be taken care of when we do this type of loan for you or any loan for that matter. Our job, when working with our borrowers, is to find the best funding source for you, the borrower, for your particular needs and or challenges and if you do fit the box for a FNMA or FHLMC or FHA or VA loan we will certainly fit you into the best deal possible. If you have been faced with being declined for a loan from a Bank or a Mortgage Banker give us a call today and we will see if we can fit you into an Alter Income Loan. Again thanks for reading and You can call us today at 916-672-6130.