January 2009

Prior to 2008, many borrowers that were self-employed could obtain home loans without having to provide documentation.  With the tightening of mortgage credit that began about 18 months ago, lenders now require self-employed borrowers to provide 2 years of tax returns to document their income.  This article is going to discuss how to plan your 2008 and beyond taxes to maximize your ability to qualify and what to know about getting qualified for an FHA loan (or any loan) being self-employed.

When you apply for a home loan, you will have to provide your tax returns in the following scenarios (this is not an exhaustive list):

• You are a self-employed sole proprietor or business owner (includes LLC’s, S Corps, partnerships, etc…)
• More than 25% of your income is commission
• You own rental property that you derive income from
• You receive income from dividends, royalties or capital gains that you are using as income to qualify for a loan
• You have income from partnerships or corporations (where you are less than 25% owner) that you want to use to qualify for a loan
• You receive 1099 income that you want to use to qualify

The underwriter will examine your tax returns to determine your income.  Generally they will average your net income from the last 2 years to calculate your qualifying income.  For example, if you get a home loan in 2009, the underwriter will average your 2007 and 2008 income from your tax returns and that will be the income used to qualify.  One common problem here is that many business owners have many business expenses that they write-off bringing their taxable income down to a very small amount that will not qualify them for a home loan.  And the underwriter will only count your net income after most of your business expenses (there are some expenses that you can add back to your income that I will discuss later).  So since many business owner write-off most of their income, they are having a lot of problems qualifying for home loans right now.

There are expenses that underwriters will add back in when determining your income off of your tax returns.  Here are the most common:

• depreciation

• depletion (this is not a common write-off and most will not have this)

• business use of home (such as a home office)

• casualty losses dues to theft, fire or natural disasters

• loss carryovers from prior years (since the loss was in a prior year, it will not be counted against your qualifying income)

• business vehicle mileage

• one-time extraordinary expenses

Since these expenses can be added back, it is a good strategy to maximize these deductions on your 2008 taxes if you plan to buy a home in 2009.  Make sure before completing your 2008 tax returns you talk to your CPA or tax preparer and explain that you would like to qualify for a home loan to buy a house and you would like to maximize your net income.  Also, mention the above expenses that can be added back in to your qualifying income to your CPA and see if you can maximize these deductions.

Additionally, FHA loans allow co-borrowers and even non-occupying co-borrowers.  So another solution for self-employed borrowers to qualify for a home loan is to find a co-borrowers who can show the required income to help you qualify.

If you have further questions or would like to be pre-approved for a home loan, please contact me as I would be delighted to help.  And please browse the other articles on www.socalfhahomeloans.com for more information about FHA loans.

Warmest Regards,

Rob Chomentowski
Sr. Loan Officer and FHA loan specialist
858-922-7899 direct
rob@affinity-financial.com

Mortgage refinancing may be in the tune of a bailout that bankers are not really piqued on doing. Since refinancing a rather poor mortgage is the next best thing to financially starting anew, there can be good and bad indications of its notion. Good in a way that you are willing to face your mortgage duties, and bad means that there sticks the basic idea of payment defaults. While refinancing can be a prickly exercise, FHA Refinance Mortgages give a breath of fresh air in rearranging mortgages closely suited to your waning mortgage conditions. With FHA Refinance Home Loans, it can give you the remedy of your mortgage turmoil to give you some monetary freedom. This FHA program will help you secure your loans in better standing.

The Federal Housing Administration or the FHA is there to provide refinancing assistance on existing home mortgages. FHA programs such as this come in with attractive benefits. Certified lenders are guaranteed by the FHA to provide the necessary funds that will allow you for whatever purpose you deem it. Since FHA Refinance Mortgages will insure your loan of the necessary repayment capability, lenders are keener to offer good mortgage rates while being assured of getting paid in case borrowers default.

FHA loans are usually given out to eligible borrowers with impressive credit standing. However, people who do not have good credit ratings can still enjoy an FHA loan on the condition that their records must not show any records of declaring bankruptcy in the previous five years. Single parents with a limited source of income can also avail of an FHA loan. As long as an individual qualifies according to FHA requirements, FHA is there to extend you loans and give out refinancing programs. FHA loan approvals depend on the assessment of the borrower’s eligibility to qualify.

Requirements of FHA loans cover renovations to be done in a cost and energy efficient manner. FHA is huge on the conservation of natural resources.

So, you ask, "What makes FHA Streamline Refinance Mortgage different from a conventional mortgage?"

FHA Refinance Home Loans offer options that are not available from other traditional mortgages, which are stricter by any means to borrowers with tainted credit standings. With this FHA program, there is security in FHA loans since lenders are guaranteed repayments. Down payment is only 3% and other costs are carried within the mortgage already. FHA also takes the responsibility in helping you find homes and lending schemes that do not have down payments. FHA borrowings can be used for home repair costs, too.

Do not be misled. FHA is not a lender but a guarantor to your borrowings from a lender. Lenders who are certified by the FHA are under the FHA’s rules and regulations and they should strictly abide by them.

The simple answer is yes. There are still programs available that allow credit challenged borrowers to buy homes with as little as three and half (3.5) percent down payments. I know the media makes it sound like the banks have stopped lending all together. This simply is not true! The program that I talked about in this article is still closing mortgages everyday. Plus it is one of the most secure programs available. The program has been around for a very long time, but got thrown by the wayside with sub-prime mortgage which caused the crisis our financial system is in right now.

The first program and you probably have heard of it is FHA. FHA has been around since the 1930s. It was designed to increase home ownership, and reduce the required down payment. Today it still accomplishes these goals plus some. FHA today is used for first time home buyer, credit challenge borrowers, and borrowers with no credit scores. FHA is also a valuable program for borrowers who are looking to refinance their homes.

FHA does have credit guidelines, but they do not look at credit scores. What is the difference you are asking, for example you can have a 540 FICO score which is a low score, but as long as you have not had any collection, judgments, or bankruptcies in the last twenty four (24) months there is a very good chance you will qualify for a mortgage with FHA. Bankruptcy, FHA does allow borrowers who have filled for bankruptcy. Generally the bankruptcy has to be discharge for twenty four months, but under extenuating circumstances it is possible to get an FHA mortgage after only twelve months after the bankruptcy has been discharge. But you will need to document the reason for the bankruptcy, and the reason you filled must be out of your control.

Qualifying for an FHA mortgage is simple. First your debt to income ratios should be no more than 32/44. The first number is your housing ratio. The percentage of your monthly income going out to the proposed housing payment including, taxes, insurance, monthly mortgage insurance premium (MIP), and any homeowner association dues (HAO) - the second number is referred to as the total debt to income ratio. This is the total percentage of your income to total debt including the proposed housing payment. FHA does allow a non-occupying co-borrower as long as this person is a family member by blood or marriage. For example if your debt ratios are to high to qualify for the home you want to purchase you could use a non-occupying co-borrowers income to qualify for the home you want. Also if your FICO score is in the low 500s adding a non-occupying co-borrower with good credit scores will strengthen the over all loan.

Second are the credit requirements, and these are only general rules. FHA really has no set credit guidelines and allows for exceptions with documented extenuating circumstances. FHA is normally looking for no credit collection (medical collections are always overlooked), no judgments, and no bankruptcies in the last twenty four months (24). If you have no credit this ok as well, but you will need to provide your loan officer with nontraditional credit, acceptable nontraditional credit references include the following utility bills, phone cell or land line, cable, and auto insurance. You will need to provide three accounts with a twelve month payment history for nontraditional credit trade lines.

Third is down payment. FHA does require a down payment of three and half (3.5) percent, conventional mortgages require at least five (5) percent down with minimum credit scores of 640. However the down payment can come from a gift from a friend or family member. There are also local grants, or bond money that are acceptable forms of down payment. So it is possible to get your down payment paid for. Plus the seller can pay up to six percent (6%) of the total purchase for closing cost , and pre-paid items such as taxes, insurance and days of interest.

FHA has very competitive rates. Mortgage rates change daily, but on most days FHA has the same rates as conventional loans, so FHA borrowers are getting the same rate on a thirty year fixed mortgage as someone with excellent credit. FHA also has lower mortgage insurance premiums than conventional loans. Mortgage insurance is paid to the lender anytime a loan to value is greater than eighty (80) percent it is to protect the lender in case of loan default. Conventional mortgage insurance is based off credit score and loan to value. Rates start at fifty basis points (.0005) of the loan with excellent credit, and goes has high as two points (.02) percent. FHA has a upfront premium that is financed into the loan of one and three quarter (1.75) percent, and a fixed monthly premium regardless of credit at fifty five basis points (.00055). To calculate your monthly mortgage insurance premium take your base loan amount multiply by your mortgage insurance factor. For example base loan amount of $90,000 * .00055 = $49.50 a month.

With the rise of Bankruptcies in our nation as a result of the recent financial upheaval many are wondering if they will qualify for an FHA Home loan with a recent bankruptcy on their credit report and in county records. Others may be seeking other types of conventional financing. In either case they would like to know how a past bankruptcy will affect their ability to obtain a mortgage. The matter gets a little more complicated since a Chapter 7 and a Chapter 13 will bring to bear different qualifying guidelines depending on which loan program the borrower is seeking.

Chapter 7 bankruptcy

Must be discharged for at least 2 years. If the discharge date was more than 12 months but less than 24 months than extenuating circumstances must be documented. Not being able to sell a home due to a job loss or transfer would not qualify as an extenuating circumstance. The borrower must have re-established credit and can show a payment history to the new creditors. Or, they may choose to not re-establish credit because they do not want to incur anymore debt. It will also require the lender to document that the situation that led to the bankruptcy no longer exists. The reason for this is simply that the lender does not want to see the borrower get into financial trouble again. So, if they can document what led to the bankruptcy and how they have corrected the habits or situation that led them to file that would show the borrower has become financially responsible and the probably of filing again sometime in the future diminishes greatly. But, mainly it demonstrates the ability to handle the overall household finances especially in regards to being able to make a mortgage payment on a timely basis each month.

Chapter 13 bankruptcy

Requires that 12 months of payout has occurred and that the payments have been made on time and also the court would have to give permission to enter into a mortgage transaction. What this means is that a person could be in a Chapter 13 currently and be able to obtain financing if all other underwriting guidelines are met. How about that? Would any sub prime lenders allow a current 13 to be underwritten? I don’t think so. That’s why this type of mortgage is so helpful to many people and you get market interest rates rather than sub prime rates with pre-payment penalties. There are no prepay penalties on an FHA loan. So, in essence a Chapter 13 is treated kind of like a consumer debt. Must show 12 months of payments made on time. How many home buyers are there that need this information? They’ve been told by their local bank or by conforming lender that they don’ t qualify and so their hopes and dreams are dashed thinking they can’t purchase a home for several more years. This information should cause them to contact a lender who specializes in FHA home loans and see about getting approved.

Similarly to a Chapter 13 Bankruptcy would be a Consumer Credit Counseling scenario. Folks who have elected this route to pay down their debts should be relieved to know that they also can apply for a mortgage as long as they meet similar guidelines. Show that they have made payments for 12 months in a timely fashion and get permission from the counseling agency to purchase a home and incur new debt.

In all 3 scenarios listed above it is important to not incur any derogatory credit. None whatsoever. Just put yourself in the underwriters shoes. There is a BK7 or BK13 or CCC and derogatory credit after the discharge or during the repayment period - how do you think that will look? It will look like the person has complete disregard for paying their bills on time. We all know that situations arise that prevent bills to be paid on time, however, most of these are not extenuating circumstances from a lender’s perspective. So, keep your nose clean.

For those of you who meet these basic guidelines set forth above take the time to contact a mortgage professional who is an expert in FHA loans and see if you currently qualify to purchase a home.

If you are interested in using the FHA 203K Loan program to fund repairs on your home or a home you are interested in purchasing, you should know that there are some repairs that you will be required to make. The lender and the FHA want to know that their investment will be protected, and as such you will have to add these repairs to your work write up in order to get approval for the loan.

Standards for Energy Efficiency

The Department of Housing and Urban Development (HUD) wants all homes that are renovated under the FHA loan program to be as energy efficient as possible. For this reason, there are several required repairs that contribute to better energy efficiency in the building. Doors and windows must be weather stripped if the weather stripping is old and worn. The outside of the building must be inspected for openings or cracks, and these must be sealed or caulked.

If you are opening any walls on the exterior of the home, such as to replace the drywall, you will need to reinsulate behind the wall. You do not have to remove walls for the purpose of insulation, however. It simply must be done if the walls or ceilings are opened. Also, attic and crawl spaces must be ventilated adequately.

If you are replacing any HVAC systems, you will need to insulate around the supply and return pipes and the ducts in any parts of the home that are not heated or cooled by the system. You also must not purchase a unit that is too large. The unit cannot be more than 15 percent larger than the house needs, unless the manufacturer does not make a unit that fits better than the one you have chosen.

Renovations Required for Safety

The FHA does not have many safety requirements. Of course, all repairs must keep the home up to the city’s coding standards. The only safety requirement that the FHA gives applies to smoke detectors. All sleeping areas must have at least one smoke detector located adjacent to the room.

Requirements for the First $5,000

The first $5,000 of the loan amount must be used for major repairs to the existing structure. Cosmetic repairs can be included in the loan, but they may not make up the first $5,000 you are given. Repairs that qualify for the first $5,000 include the following:

* Repairing structural damage
* Repairing termite damage
* Making the home handicapped accessible
* Installing new HVAC systems
* Septic or well installation or connection to city sewer
* Fixing the roof, flooring, or gutters
* Major changes to landscaping
* Major projects that increase aesthetics, such as adding new siding or a covered porch

Once you have $5,000 of major repairs in your work write up, you can begin including minor cosmetic items like new paint or trim.

In addition to these requirements, each individual lender may have repairs that they want to see done to the home. Remember, the lender wants the home to be sellable in the event that you do not repay what you owe, thus the reason for required repairs. This is not a problem, however, because the money will be made available in the FHA 203K Loan for these items.

Keeping a close watch on your credit score is essential for getting a FHA Loan.  Although FHA Loans and not credit score driven and can be fairly lenient when it comes to credit scores, it is still very important to be careful and watchful of your credit at all times.  In this article I will discuss some tips to keep your credit outstanding and also tips to raise your credit score if you currently have a lower score then you would like.