March 17th, 2016 2:16 PM by Gregg Mower
In today’s world of ever-tightening regulations in the wild world of Mortgages, it is difficult for the seasoned professional to keep up with all the different loan products, let alone the consumer. If Lending is that hard you may ask how can I trust the information I am getting from my professional Loan Officer. The answer is not so simple if you have an easy situation, like one job for several years, one bank account with plenty of money in it, and great credit, it will be easy to get a loan, but if you don’t fit that box then things start to get confusing. It is a full-time job to keep up with all the new laws and regulations pertaining to Mortgage lending and all the products that are entering the market daily. Not to mention that not all lenders offer all the different loan products available today leaving the consumer dazed and confused when trying to get a home loan. This blog post will hopefully provide some guidance in navigating the Mortgage Maze. We will explore the options for Owner Occupied Primary Residence loans.
When determining the category of loan you should have, we have to first confirm that the home loan you are in need of is, in fact, offered for your situation. Loans can be for a Purchase of a house or a Refinance of a house which are basically the same qualification requirements. For a Refinance loan on your primary residence, you can simply change the word equity (or the difference between the value of the home and the amount you owe) for down payment as lenders are looking at the overall Loan to Value to determine risk. The lower the Loan-to-Value the less overall risk, or the more you put as a down payment the lower the risk to the lender and the better the terms of the loan will be. The next import fact will be whether we are looking for a loan on your primary residence or a rental property as the products for those will vary greatly as well. In This article, I will simply attack the owner occupied Purchase and Refinance Loans and leave the investment property loans for another day as they fall outside of the majority of the new laws and regulations.
So we know we are looking for a loan on a Primary Residence which will automatically make your loan what is referred to as a Qualified Mortgage or a QM loan. This designation was coined in the Dodd-Frank Act., that changed the way lenders can deliver loans to people that are looking for financing on their primary residence whether it is a Purchase of Refinance. California calls loans on primary residences “Cover Loans” and have adopted similar laws as the Federal laws with a few exceptions, like the prohibition of offering adjustable rate loans with negatively amortizing payments, and interest only loans. Both the Federal Government and California passed these laws to protect consumers by forcing rules on the way loans can be delivered and disclosed by lenders. The Federal Government took it a step further and created the Consumer Finance Protection Bureau (CFPB) where consumers can report lenders violating the laws pertaining to lending. With these new laws, it has forced the Lending Industry to pick and choose which products they will, or can, offer to consumers. We have seen lenders fall into 3 basic categories. The first is for “A” Paper Qualified Mortgage lenders, second are Alternate Income or Alt "A" Lenders, and Third Are Private or Hard Money Lenders. The latter of Private or Hard Money lenders fall outside of the Qualified Mortgage rules so those products are only offered to those that are buying an investment property or property they do not intend to live in, or property used for business purposes, which we will cover in another article.
In the Industry, we refer to loans on Owner Occupied Primary residence or secondary residences as Qualified Mortgages and I will refer to them a QM loans. Let’s looks at some of the products that are offered for the “A” Paper QM Loans. First, to qualify for an A Paper QM loan, you must have good enough credit, generally, your credit score will have to be greater than 620, however at MAE Capital Mortgage we have Lenders that will go down to a 550 credit score if a borrower has a good explanation as to why their score is that low, it will be an FHA Loan. The types of QM Loans in the "A" Paper category are; FHA Loans, Convectional Loans, VA Loans, and USDA Loans. The types of loans under each one of those categories are 5,10,15,20,25, and 30 year fixed rate loans and FHA will offer an Adjustable rate loan to round off the loan types. The down payment requirements will vary from 0 down for USDA loans (Only offered in certain zip codes where it is considered rural), 3.5% down for FHA loans and Conventional loans will have a minimum of 5% down requirement. If you are putting a large down payment of 20% of the purchase price or more, you will avoid having to pay for mortgage insurance on a Conventional loan. All of these A paper loans will require you to document your income fully with Pay-Statements for the last 2 months, W2s for the last 2 years and Federal Tax returns for the last 2 years. By providing your income documentation the underwriter will evaluate your ability to repay the mortgage with those documents. Generally, an underwriter will not approve your loan if the total of all your minimum monthly payments on your revolving and installment debt, plus your new house payment, taxes, and insurance is greater than 43% of your gross verified income. That may sound relatively easy if you have a salary job, but if you are self-employed or have all or a portion of your income as commissions, it may become difficult to show enough income to qualify if you write off a lot of expenses.
Which brings us to the Second Category of QM loans, Alternate Income qualifying loans or Alt-A loans. These loans are not offered by most traditional “A” Paper lenders as they come with a little higher risk as not all the income documents that are required by the A Paper folks are necessary for Alt-A loans. Although these loans are considered QM Loans, by the fact they are still owner occupied loans, the hedge funds, that are predominately purchasing these types of loans, have figured the system out to stay within the QM guidelines of proving the borrower’s ability to repay the loan. They do this by requiring 20% or more for a down payment or an 80% LTV equity position for refinance loans. Then they prove income by averaging the deposits the borrower puts into his or her bank account every month over the last 12-24 months. If you are using bank statements to qualify you will need a 640 or better score with only a 20% down payment. The more you put down, or the larger your equity is for a refinance, the lower your credit score can be, as the risk of a borrower walking away from their investment diminishes with the more they put down or the higher the equity they have into a home. Here is where it gets interesting, if you have bad credit (a score lower than 600), and have a large down payment or equity position, and can prove your income we have sources that will purchase that loan as well. These loans are called High-Cost Loans and will require a borrower take a class to fully understand the type of loan they are getting. All of these situations will be offered either a 30 year fixed rate or an adjustable rate loan with no negative amortization.
This might sound like filing your tax returns, or nails on a chalkboard, and that is why we are here to help navigate you through the process. What you need to know is what Category of loan you fall under, a classic "A" Paper loan, or is your situation a little more unique and requires an Alternate Loan. Sometimes we can fit people into the "A" Paper loans where our competition can’t figure it out, so if you have been declined for a loan let us run your scenario up the flag pole and see if we can make it work. I know this as I have saved many of my clients from lenders that just could not figure out how to put the pieces of the puzzle together. Just recently I funded a loan for a client that was turned down by 2 other lenders that couldn’t think outside the box. So the client was referred to us by an "A" Paper lender that thought the client needed an Alt "A" Loan that they did not provide. We put a co-borrower on an FHA loan, and even though they had a large down payment, it still made sense to get them in with an FHA loan. When they get their situation fixed we will refinance them to a Conventional loan and drop the mortgage insurance and lower their payment even further. Even though the rules have tightened for qualifying for a loan there still are creative ways to get things done and stay within the laws of the land. Which brings me to an ugly word and that is loan fraud. As Lenders we are trained to detect loan fraud and will not tolerate it as it can dramatically affect our NMLS license and our Real Estate Licenses, so if you are thinking of doing something to get a loan that you know is wrong we will detect it and shut it down. We are also required to report any such cases so if you have been told to say you are living in a home when you are not or vice versa, please don’t do this, we can teach you how to get a loan the right way even if it takes a little more time. I was always taught that “Anything worth having is worth working for”.
To recap, there are two basic categories of owner-occupied QM Loans, the “A” Paper loans that consist of FHA, Conventional, VA, and USDA Loans and the Alternate or Alt "A" loans that are more flexible in the way they qualify a borrower. Both of these Categories are for loans on a borrower’s primary residence or second homes. Both will be disclosed in accordance with the Truth in Lending RESPA Integrated Disclosure rules or TRID. Although both categories have their place to serve those that need a home loan, there are still qualification requirements that have to be met for both. For assistance on which category you might fall under or what type of loan is best for your situation give us a call at MAE Capital Mortgage Inc. (916) 672-6130, we can do loans in the state of California only. If you wish to submit a scenario via the internet, click here. Thank you for reading I hope this helped you.