March 2009

Gather Your Income Documenation Before Applying For An FHA Loan!

by rob on March 22, 2009

Gone are the days of low documentation home loans. Getting a home loan today requires a lot of documentation. And if you are prepared, it will make the process a lot smoother.

Credit Score and Credit History

The very best place to begin preparing for an FHA loan is to check your credit score. Make sure you get a “tri-merge” report that merges all your credit information from the 3 credit bureaus. You can get one at www.myfico.com or at any of the credit bureau web sites (Experian, Equifax, Trans Union). Or you can work with your loan officer to do a credit check for you. This is the best option because the loan officer will get a “mortgage oriented” credit report and the cost will be less to you.

Make sure you go through your credit report with a fine tooth comb to make sure everything on your report is accurate. For more information on credit tips visit my article at www.socalfhahomeloans.com. Generally you’ll need a 620 or above credit score to get the better FHA interest rates. Although you still can get an FHA loan with a score below 620.

FHA required Job History

Generally, FHA loan underwriters are looking for a 24 month job history to qualify. But there can be many exceptions to this. Gaps in employment are allowed if you have a good explanation (attending school, laid off, sabbatical, etc…). There also has to be an explanation if changing careers within the 24 month job history.

FHA required Income Documentation for W-2 Wage Earners

If you are a W-2 wage earner, you will want to gather your last month’s paystubs and last 2 years of W-2’s. If you receive a bonus as part of your income, the lender will require a 24 month history of that bonus in order to count that as part of your income. The lender verifies your bonus history by send a “verification of employment (VOE)” form to your employer who will fill out details of your pay on the form. Additionally, if you are paid hourly and your hours fluctuate or you receive overtime pay, the underwriter will also require a VOE and they may take an average of your monthly income over a longer period.

Requirements For Self-Employed or 1099 Indpependant Contractors

If you are self-employed and/or get paid via 1099, the FHA underwriter will require your most recent 2 years filed tax returns, all pages and all schedules. So if you are applying for a loan in 2009, you will need your 2007 and 2008 tax returns. If you own a coporation they will require your corporate returns and your personal returns. The FHA underwriter will take your net business income, average the last 2 years and use that to determine your qualifying income for the loan. This can be a challenge as many self-employed business owners take advantage of tax write off’s and do not show much net income on their tax returns. There are deductions that self-employed can add back in such as depreciation and the business used of a home. And also, if debts on your credit are paid by the business FHA will not count the debt in your debt-to-income ratio in qualifying. Qualifying as a self-employed borrower can be complicated, contact me for more detailed information on qualifying for an FHA loan as a self-employed borrower.

FHA Down Payment and Cash Reserves Documentation

FHA loans require that you document the source of your down payment, and also the cash reserves you will have after closing on the house. As a note, FHA does not require you have cash reserves after closing, but it can help as a compensating factor if you are on the borderline of qualifying. To document the down payment and cash reserves, FHA will require your last 2 months of bank statements all pages where you’ll be getting your down payment. Or if a retirement account, your last 2 mos or quarterly retirement statement all pages. FHA allows you to receive a gift for ALL of the down payment. If you are receiving a gift, you must have a gift letter (which your loan officer will supply), bank statements from the gift donor showing the source of the gift, and evidence the gift was transferred to you.

Be careful of large deposits showing on your bank statements during the prior 2 months and while applying for a FHA loan. FHA underwriters will ask you to “source” any large deposits into your bank account over the last 2 months.

Details are extremely important with all the above documentation. You have to be meticulously detailed with gathering all the documentation, making sure it’s clearly readable, and making sure not even 1 page is missing. For instance with your bank statements, you must have EVERY page of your recent bank statement, there cannot be one page missing. And the statements must have your name and account number on them. And for example if you are self-employed, you must have ALL pages and ALL schedules of your personal tax returns (and corporate if you own the company). There can’t be any missing pages.

I hope you enjoyed this article. Please contact me for further details.

Rob Chomentowski

Sr. Loan Officer

858-922-7899 (direct)

rob@affinity-financial.com

$8,000 Tax Credit and FHA Loans

by on March 15, 2009

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Demystifying Mortgage Insurance

by rob on March 5, 2009

For about 8 or so years prior to 2008, mortgage insurance wasn’t something most people getting a home loan had to worry about. If a borrower was putting less than 20% down, in most cases they would get a 1st mortgage for 80% and then a 2nd mortgage for 5-20% of the remainder of the price, depending on how much they were putting down.

Now let’s fast-forward to 2009 and the current climate for home mortgages in the U.S. There are currently NO 2nd mortgages available that will go over 80% of the purchase price or value of your home. So if you want to put less than 20% down on a home you have to get mortgage insurance. This article will explain mortgage insurance for FHA home loans and conventional home loans.

Mortgage Insurance using FHA Home Loans

With an FHA loan there are 2 types of mortgage insurance. Upfront mortgage insurance that can be either paid up front or rolled into the new loan balance, and monthly mortgage insurance that is paid monthly. With an FHA loan the monthly mortgage insurance must be paid for 5 years minimum. Then after 5 years if your loan balance is 80% or less than the value of your property, you can have the mortgage insurance eliminated.

Here’s a chart of the mortgage insurance for FHA loan purchases:

Down payment	Upfront mortgage insurance	Monthly mortgage insurance
<5% down payment	1.75% of the loan balance	.55% of the loan balance
>5% down payment	1.75% of the loan balance	.50% of the loan balance

You get a break on mortgage insurance with a FHA loan if you get a 15 year fixed vs. a 30 year fixed mortgage when you purchase. The upfront mortgage insurance on a 15 year fixed FHA loan is still 1.75%, but the monthly mortgage insurance is .25% if you put <5% down, and there is NO monthly mortgage insurance if you put >5% down using a 15 year fixed FHA loan.

Here’s a chart of different loan balances and what the upfront and monthly mortgage insurance would be using an FHA loan to purchase:

Initial loan balance and down payment	Upfront mortgage insurance	New loan balance after up front mortgage insurance	Monthly mortgage insurance
$200,000 <5% down payment	$3,500	$203,500	$93/mo
$250,000 <5% down payment	$4,375	$254,375	$116/mo
$300,000 <5% down payment	$5,250	$305,250	$139/mo
$350,000 <5% down payment	$6,125	$356,125	$163/mo

When you refinance an FHA loan to another FHA loan with a streamline refinance to lower your rate, the upfront mortgage insurance is 1.5% and the monthly mortgage insurance is the same as a purchase loan. You are also refunded a percentage of the original upfront mortgage insurance you paid when you purchased. How much you are refunded depends on how long ago you purchased.

Remember, you can pay the upfront mortgage insurance up front if you don’t want it added to your loan balance. Or even better, with a purchase, try to negotiate with the seller to credit you to pay the upfront mortgage insurance. FHA allows up to a 6% credit from sellers to pay a buyers closing costs.

Mortgage Insurance using Conventional Home Loans

With Conventional home loans there is no upfront mortgage insurance, but slightly higher monthly mortgage insurance. With a conventional loan once the mortgage balance becomes less than 80% of the value of the property, the monthly mortgage insurance is eliminated.

I will provide general estimates in the chart below for conventional loan mortgage insurance for borrowers with good credit on primary residence purchases using 30 year fixed rate mortgages. There are a lot more variances with conventional mortgage insurance depending on credit score and other factors.

Here is a chart of monthly mortgage insurance using a conventional loan:

Down payment	Monthly mortgage insurance % of the loan balance
5%	.94%
10%	.62%
15%	.44%

Here’s a chart of different loan balances and what your monthly mortgage insurance would be using a conventional loan to purchase:

Down payment	$200,000 loan balance	$300,000 loan balance	$400,000 loan balance
5%	$152/mo	$223/mo	$297/mo
10%	$93/mo	$139/mo	$165/mo
15%	$62/mo	$93/mo	$124/mo

Keep in mind that conventional loans with mortgage insurance have much tighter underwriting guidelines and credit requirements than FHA loans. And in certain states, mortgage insurers require a minimum of 10% down payment.

Also something to remember, mortgage insurance is currently tax deductible. Please discuss this with your tax preparer for more details.

I hope this article has helped you to understand how mortgage insurance works with FHA home loans and conventional homes loans. Feel free to email or call us to discuss any aspects of getting an FHA or conventional loan to purchase or refinance.

Warm Regards,