AVOIDING THE MORTGAGE MEAT-GRINDER FOR THE SELF-EMPLOYED BORROWER (PART I)
I have been in the mortgage business since 1978 and I have never seen it so tough for a self-employed borrower to obtain a home mortgage. I’d like to share a recent example of a superbly qualified borrower who recently confronted a six-week process.
The borrower owns a percentage of multiple partnerships and also receives W-2 income. This particular borrower was purchasing a home for $600,000 and putting $200,000 down payment, thus his proposed loan was $400,000. The same borrower has more than $500,000 is cash and savings. As with 90 percent of all loans, the aggregator underwrites and purchases the loan, which will ultimately be sold to Fannie Mae or Freddie Mac.
The borrower’s Debt-To-Income Ratio (DTI) was on the high side. The Automated Underwriting Guidelines (AUS) called for a copy of all partnership tax returns (six different tax returns times two years of each) for a total of 12 tax returns. In addition, my processing department had to obtain the 12 transcripts directly from the IRS.
When the tax returns were reviewed, there was a couple of “Short Term Liabilities” (debts due within one year). The underwriter required a full description of “Short Term Liability” and source documents to prove if it was renewable or due within a year; fortunately, the obligation was renewable so it didn’t disqualify the borrower.
In addition to the back and forth during the return review, it was noticed there were some Passive Losses Carried Forward. Passive Losses cannot be a deduction in the current year because tax codes require Passive Losses to be used to offset Passive Income or Passive Gains. This review raised additional questions, which only the borrower’s CPA/tax preparer could satisfy, so the borrower’s CPA was brought back in the picture for additional explanation.
To further complicate the transaction, the property the borrower was purchasing appraised less than the sales price; earlier this year, some areas in the Tampa Bay market abruptly transitioned from a buyer’s market to a seller’s market, forcing the buyers and sellers to renegotiate the sales price. Once the sales price was renegotiated, the entire loan application had to be modified, which resulted in the borrower’s Loan-To-Value (LTV) to increase from 75 percent LTV to 84 percent LTV. The borrower was making the same down payment but the LTV is based on Purchase Price or Property Value, whichever is less.
This new twist subsequently modified the AUS results and required an additional step because now the loan required Private Mortgage Insurance
If you’re self-employed and thinking of obtaining a mortgage in the next 3-12 months, we strongly suggest you contact a residential lending originator for a complete income analysis before signing a contract to purchase a home. It will save everyone in your transaction relief from the mortgage meat-grinder.
To be continued …
Bill Null, Senior Vice President of Central Bank, Residential Lending Manager, can be reached at (813) 751-0496 or email [email protected] NMLS # 841837