Although getting a residential mortgage seems like no big deal, anyone who has ever applied for a mortgage knows that the paperwork involved can snowball into a mountain. My company’s practice is to detail what is needed up front in order to minimize any request for documentation during the process. Many companies’ loan officers are reluctant to do that because no loan officer wants to lose a loan by asking for paperwork, but then you know what happens? Three weeks later the borrower may find out that he really didn’t qualify for the pre-approval or issued commitment. What I’m talking about is doing some little things up front in order to have a smooth process towards the end goal of closing on your purchase or refinance. Keep in mind that standard documents required are pay stubs, savings statements, W-2 and tax returns. I’m not going into volumes of underwriting guidelines, but if you are not in the mortgage business some of the uncommonly known tidbits shared below just may help you keep the hair on your head and the ulcers contained.
Fannie Mae does not require a borrower to pay off any outstanding collections or non-mortgage charge-offs regardless of the amount. But, the subject property must be a primary single unit only. Two- to four-unit properties and second homes require collections and non-mortgage charge-offs to be paid in full when totaling more than $5,000 prior to closing. For one- to four-unit investment properties, collections and non-mortgage charge-offs need to be paid in full when totaling $1,000 prior to close.
Condos and co-ops are different from one- to four-unit homes. They need to be qualified in and of themselves in addition to an appraisal. The main concern of a lender is to make sure there is no major litigation going on between any party and the HOA (homeowners association). New construction and investment condo units require a full review of the building that includes the following: a full condo questionnaire, budget, 10-percent reserves based on the net budget total, bylaws. Also, one entity cannot own more than a certain percentage of the overall units in a condo development. Below is a breakdown:
Condo project with two to four units: One unit owned by an individual or single entity
Condo project with five to 20 units: Two units owned by an individual or single entity
Condo project with 21 or more units: 10 percent of the total units owned by individual or single entity
Vacant units being actively marketed by the developer are not included in the calculation of the developer’s percentage of ownership, whereas any unit rented by the developer is included in their percentage of ownership.
In order to avoid the endless paper trail of large deposits, wire transfers, cash deposits etc. it’s important to first review the borrower’s bank statements and determine whether to submit that bank statement or provide a fully completed VOD (Verification of Deposit) instead.
A VOD provides the basic information a bank statement does such as account ownership, account number, address etc. without the daily transactions nuances that a bank statement shows.
Remember FHA and Fannie Mae usually but not always request 60 days of bank statements or a VOD, whereas Freddie Mac usually but not always requests the most recent 30-day bank statement or a VOD. This can help you avoid the snares of sourcing unverifiable deposits in the borrower’s account.
Your mortgage professional should review your AUS (automated underwriting) findings before obtaining and submitting your assets to the lender. It’s too late after the underwriter has seen everything to correct a mistake.
Did you know that only conventional Fannie-Freddie loans do not require that a non-permanent, resident-alien borrower show proof of prior history of residency or future renewal? As long as the borrower has a valid EAD (Employer Authorization Document) at the time of closing, no other documentation is required.
FHA, however, requires that the EAD is valid within one year after the closing date and either a proven prior history of prior renewal or a determination of future renewal from the USCIS.
Conventional programs like Fannie Mae’s Home Ready or Freddie Mac’s Home Possible have FHA-like characteristics that can help a borrower qualify if they do not meet FHA’s eligibility requirements.
Job History and Income
FHA has quietly tightened up on borrowers changing jobs frequently. Formerly, FHA required additional documentation and stricter review of borrowers with more than three job changes within 18 months. The new guideline is now 12 months. Borrowers changing lines of work frequently present an especially difficult time because the guideline requires underwriters to request the following when the above is present: transcripts of training and education courses demonstrating qualification for the new position, or employment documentation evidencing a continual increase in income and/or the benefits when you switch jobs to document the file well to prove to the underwriter that you have stability and can meet your obligations.
LOXs (letters of explanation) from the borrower and prior VOE’s (verification of employment) to present a complete picture should be standard documents at the time of initial submission.
Only FHA allows use of child support income with three months of verification of receipt. With a fully executed divorce decree or court order, three months of verified receipt (bank statements, cancelled checks, payment history from family court etc.) are needed; without a fully executed divorce decree or court order, 12 months of verified receipt, six months of which must be the same payment every month or else an average of the 6 months of payments must be used, and if received for less than two years then it must be averaged over the time of receipt (FHA guideline). In either case, three years of continuance is required. Fannie Mae does not allows any child support to be used less than six months and requires a court-ordered decree. Freddie Mac does not allow less than six months of receipts for child support and requires a court-ordered decree.
Did you know that Freddie Mac will also consider properties with deed restrictions?
Freddie Mac has followed Fannie Mae in allowing properties such as condos and PUDs with these types of restrictions: Resale restrictions regarding foreclosure or deed in lieu if it survives the foreclosure of completion of a deed in lieu, or terminates upon foreclosure of completion of a deed in lieu.
The resale restrictions cannot come from the builder or developer.
Income restrictions only apply to a primary one-unit residence (not a manufactured home); the property can only be a detached single family, condo or PUD for either purchase or rate/term (no exceptions).
Stay tuned for the next bunch of tidbits that can make or break your deal!By Carl E. Guzman, CPA, NMLS 65291
By Carl E. Guzman, CPA, NMLS 65291