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Self-employed landlords battle harder for home-loan approvals

Self-employed landlords battle harder for home-loan approvals

All Fullerton residents Scott and Tina Foley, longtime clients of mine, wanted to do was refinance a rental property. They did it before. Easy, right?

After an exhausting process, they thought they were finally at the mortgage funding finish line when one more phone call came. One more question.

The loan funder asked if Tina was currently employed at their jointly owned construction firm.

“Why would you ask?” the Foleys incredulously asked.

“Oh, let me look,” said the funder. “You got stuck with Detail Debbie (as your underwriter).”

Throughout the process, each answer just seemed to trigger more questions. Document this. Defend that. Notate and prove where the tenant rents were received on the bank statements.

Get written CPA explanations about the business tax returns. And, on and on it went.

“I was so stressed out I was ready to explode,” said Tina.

What was this all about? Why are mortgage loan originators, loan processors and underwriters digging deeper than normal, demanding more documentation, especially from self-employed borrowers and landlords?

Catastrophic economic fallout from COVID-19, that’s why.

For all the righteous and responsible reasons, nobody but nobody in the lending policy world, nor the mortgage manufacturing business wants to see a mortgage made today that is going to end up in default shortly thereafter.

For better or worse, jobs and company viability can be hanging in the balance, especially for vulnerable industries.

Like it or not, one way to figure out if a business is operating at a profitable level, currently viable and reasonably sustainable in the face of continuing COVID-19 economic damage is to put the screws to it. That is, go detective.

Your underwriter will consider the profit-and-loss statement against the cash-flow of several recent months of business bank statements. Do your numbers seem to fit?

The lender will ask to review recent billing invoices you’ve sent to your customers. They might call or Google your business and look at the website. Are you there? Are you operating?

Now, let’s consider rental income scrutiny.

Plenty of tenants are paying their rent. Plenty can’t pay because they’ve lost their jobs and don’t have the money. Some others refuse to pay because they are taking advantage of the eviction moratorium and their landlords.

How can any underwriter in his or her right mind just assume anything about current rental income — particularly regarding qualifying income? They want a paper trail to verify the rents you are currently receiving.

Underwriters get their new guidance and mandates from the likes of their internal underwriting policymakers (portfolio lenders), Fannie Mae, Freddie Mac, Veteran’s Affairs, Federal Housing Administration. If something is missing in the file, the mortgage may not be saleable to Fannie Mae, for example. And, worse, big misses could also mean employment termination.

Fannie Mae posted 139 COVID-19 FAQ’s. That’s 27 pages!

Even W-2 wage earners will be examined more closely.

If you are contemplating a refinance or purchase loan, consider the following:

  1. Have an honest conversation with your Mortgage Loan Originator about the depth of the information you will likely need to gather as your unique situation requires. Are you up to the challenge?
  2. Confide in your Mortgage Loan Originator about worries you in the credit decision process. The originator may be able to ease your angst, offer you alternative ways to document and defend or tell you right up front, this won’t fly, so don’t apply.
  3. Have some empathy. There are not enough mortgage industry workers to handle the crushing amount of loan volume. Underwriters and everyone else are just exhausted by these stress-filled, long days. Consider your vocal posture before you pick up the phone to ask a question.

Freddie Mac rate news: The 30-year fixed-rate averaged 2.99%, down 2 basis points from last week to the second-lowest rate in at least 49 years. The 15-year fixed-rate averaged 2.51%, down 3 basis points from last week.

The Mortgage Bankers Association reported a nearly 1% decrease in loan application volume from one week earlier.

Bottom line: Assuming a borrower gets the average rate on a conforming, 30-year fixed-rate loan of $ 510,400, last year’s payment was $ 215 more than this week’s payment of $ 2,149.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point cost: A 30-year FHA at 2.25%, a 15-year conventional at 2.25%, a 30-year conventional at 2.5%, a 30-year conventional high-balance ($ 510,401 to $ 765,600) at 2.875%, a 30-year jumbo fixed rate at 3.25%.

Note: The 30-year FHA is limited to loans of $ 442,750 in the Inland Empire and $ 510,400 in Los Angeles and Orange counties.

Eye catcher loan of the week: A 30-year fixed-rate conventional mortgage at 3% without any points or closing costs.

Jeff Lazerson is a mortgage broker and adjunct professor at Saddleback College. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.


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