Can Income from Your Vacation Rental Help You Qualify for a Mortgage?

Ok.  I’m going to go out on a limb here and say that someone reading this post has, at one point in his/her life, taken an Uber to an AirBnB.  It makes sense and it’s a perfect exemplification of the “gig economy” working in both housing and transportation.  Take a car you don’t own to stay in a play you don’t own, yet efficiently meet the needs of your travel and lodging.

What about the other side of the equation?  Let’s say you’re the owner of the property that you list on a short-term rental website?  And let’s go a step beyond and say that you make a practice of renting your property such that it generates a quantifiable amount of income each year?  Can you use this income to qualify for a mortgage?

The Basics

Let’s first paint rental income in some broad strokes.  We’ll come back to some of these later so it’s important to understand how the mortgage industry treats rental income in general.

  1. Rental income almost always needs to be generated by an investment home.  This means the subject cannot be a primary residence or a true second/vacation home.  In cases where the property is a multi-unit (duplex, triplex, 4-unit), it is acceptable if one of the units is a primary residence while the other(s) is rented.
  2. Rental income, for the vast majority of mortgage qualifications, requires a one-year lease agreement in place.  Yes, the lease may have converted to month-to-month after the first year, but lenders are looking for stability and they largely define that as a 1-year lease to start.
  3. Guidelines will vary depending on whether the borrower is purchasing or refinancing, so in the latter case, demonstrating rental income on a property by way of a two-year tax return history can go a long way towards establishing stable and usable income.
  4. Boarder income (rooms rented within what is usually a single family residence, or SFR) is not generally allowed as qualifying income with a few exceptions.  If you think you may have such a situation, let me know and we’ll discuss in detail.

Off We Go!

I realize that some “vacation” rentals are just that.  Stunning locations, resort-like amenities, etc.  But what about the very “workmanlike” accessory unit (aka, “ADU”) on your primary home that you’ve consistently rented out over the last few years?  Sure, you’ve never had a long-term tenant or lease, but thanks to technology, you’ve been able to keep the unit rented for a majority of days in the year.  Here, we’re going to assume our borrower is looking to refinance and use the income generated by the short-term rental to help with the qualification.  Let’s again go to the numbers:

  1. If this property is your primary home AND it’s a single-family residence AND the accessory is legally permitted AND you have a two-year rental history per your tax filings, it’s likely you can use this income to qualify.  On a purchase, a rental survey would be used to determine the market rents.  On a refinance, the owner’s tax returns would show the historical rental income/loss.
  2. If you do not claim rental income on your tax returns, you cannot use it to qualify, even if you have the rental receipts to show you’re renting the property.  An exception here might be a bank statement or investor loan that does not require tax returns.
  3. If the home in question happens to already be your vacation residence, you cannot refinance it as a second/vacation home and use rental income from it.  Vacation residences cannot claim rental income per the definition of their occupancy status.

The Devil in the Details

As you can see above, the underwriting attitude surrounding short-term rental income is more favorable than it was in the past.  The trend is good.  But if you’re going to make a case for using short-term rental income (AirBnB, VRBO, etc.) from a property you own, your best bet is to have a 2-year history of declaring the income on your tax returns.  It’s further helpful to have all of your service provider receipts for the renting of the property.  Last but not least, your property must be legally able to be rented both per the terms of your existing or new financing and by any ordinances in the town where the property is located.  With the above, we are available to help with an understanding of what’s possible in terms of your mortgage goals, so get in touch any time.

Bon voyage, 

Rob Spinosa
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 – (866) 934-7283

What Is an Alternative Mortgage?

Every so often in popular music, movies, art and culture, the unconventional becomes the rage, the “alternative” becomes mainstream.  When it does, it usually reshapes people’s ideas of what’s “normal” and it can redefine what’s acceptable — even preferred — for a generation or more.  But…mortgage lending is not quite that exciting.

No, instead, alternative mortgage lending, also known as “non-QM” or “unconventional mortgage” or even yesteryear’s “Alt-A,” simply provides a viable solution to home loan scenarios that don’t quite fit in the relatively narrow box of conventional mortgages.  Conventional loans include mainstream conforming loans, FHA and VA programs and even the widely-accepted jumbo mortgage options for those who need loans with higher amounts.  But for now, let’s focus on some of the main alternative mortgage programs and how they help buyers and homeowners in the real world.

Asset Depletion

An asset depletion loan allows a buyer or borrower to leverage his/her cash equivalents, investments and sometimes even retirement accounts to derive a hypothetical income stream that can be used for qualifying. These assets do not need to be moved or liquidated, just documented. For those who have sufficient net worth but insufficient traditional qualifying income, an asset depletion loan (also known as asset-backed, asset utilization, asset amortization, etc.) can prove an ideal solution.

Bank Statement Qualification

Business owners who show strong income into their business may want to consider a bank statement loan as an alternative to a stated income loan. For a bank statement qualification, we will typically examine 12 months of business bank statements. We’ll total all of the legitimate business deposits and we’ll apply an expense ratio to that sum. The resulting figure is the qualifying income. For those who “write off” a lot of business income on tax returns, a bank statement loan may circumvent that age-old challenge, because for these programs, no tax returns are required.

Debt Service Coverage Ratio (DSCR)

For the real estate investor who will struggle with a conventional mortgage qualification, we now have the debt service coverage ratio, or DSCR, home loan option. This program looks at the property’s income and nets out the housing payment on it. As long as the ratio is positive (and all other qualifying criteria are met), we have a deal.

Another great aspect of alternative lending is that some of the features above can be combined, or other positive aspects of a borrower’s profile can be added.  For instance, those who have a lot of equity in real estate may be able to parlay some of it into qualifying income, then combine that with regular asset depletion and circumvent an issue a conventional lender may be having because this same person’s tax returns don’t really show the fair story.

The moral of the story is that there’s a “makes sense” element to approving alternative mortgages and if you feel that the mainstream lending industry hasn’t given you a fair shake, we are here to help match you to a program that sees the light and gets you a great outcome.

Get on the snake, 

 

Rob Spinosa
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 – (866) 934-7283

Howdy, Partner!  How’s the Income Look on Your Mortgage Application?

I don’t care how successful your S-Corporation or partnership may be.  When you go to get a home loan, there will be a new sheriff in town — your mortgage lender.  So before your loan process gets hung up at high noon, I thought I’d let you in on a secret about how most lenders will qualify your income.  Let’s go, amigo.  We’re burnin’ daylight.

Check Yourself

Most of what we focus on below will pertain to the self-employed partner or owner in an S-corp.  The widely-accepted definition of ‘self-employed’ is greater than a 25% ownership interest in any business entity.  So, look at your K-1 form if you don’t already know.  If your ownership interest exceeds 25%, you can expect that your mortgage lender will ask you for not only your personal income documentation (as applicable); paystubs, W-2 forms, K-1 forms and personal tax returns (1040 Federal Tax Return), but also the Federal tax returns of the business entity itself.  In the case of a partnership or LLC, this will be a Form 1065 and in the case of an S-Corporation, this will be an 1120S.  “But wait!” you say, “They can claw the business returns out of my cold, dead hands!”  OK, that’s why we’re having this conversation, partner.  Get this straight with your tax professional and the other owners before finding yourself in this one-horse town.  If you’re greater than a 25% owner, we need your business documents too.

Saloon Math

Assuming you’re greater than a 25% owner and we now have the ability to review your documents, we’re going to start analyzing your income by reviewing your K-1 forms.  A very key piece of your qualification, and one that most do not know about, is that we are primarily looking for distributed income.  Owners who receive ordinary income (Box 1) but do not have distributed income will often have difficulty qualifying with K-1 income.  Yes, they could still qualify with so long as the business itself is not showing a loss in that year(s), but frequently a business owner will have both compensation to officers (W-2) and K-1 income.  When income is not distributed, we will next turn to the balance sheet on the business tax return and seek to prove business liquidity.  We will almost always require additional support from the tax preparer to state that distribution of previously undistributed income would not cause financial harm to the business.  These kinds of requirements often rankle not only the tax preparer but the business owner himself/herself.  So again, before galloping into this town, guns a-blazin’, have your posse ready to save your hide.

The OK Corral

Here’s what I find most often.  If a business (partnership, LLC or S-corp) is doing well and paying both wages and distributed earnings to its owners, it’s a fairly straightforward qualification.  Yes, there is more documentation required but if the business keeps good books, none of this is tragically problematic for the borrower.  Where a business is not distributing earnings, things can get a little trickier, but certainly not impossible.  Lastly, and thankfully more rarely, are businesses where they are paying out wages (W-2 earnings) but posting a loss on the K-1 and/or business returns.  These borrowers should expect for that cover to be blown shortly after getting out of the saddle.

If you are a self-employed business owner, especially a partner, LLC member or S-Corp owner and you are having difficulty getting a great loan, don’t assume that your loan officer understands how to qualify your income.  Sadly, many in our profession lack the knowledge, expertise and experience and there is no education or licensing requirement that could assure you they know what they’re doing.  Ultimately you would find out once your loan goes through underwriting, though you may not have the luxury of waiting.  If you need clear, expedient answers on these scenarios, whether you are a borrower yourself or a tax professional assisting a borrower with a mortgage application, get in touch any time and I’ll be happy to help.

Giddy up, 

 

Rob Spinosa
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 – (866) 934-7283

Form 1098 and Your Mortgage Interest Statement

“At first you go bankrupt slowly, and then all at once.”  This quote has been attributed to Ernest Hemingway, Mark Twain and even F. Scott Fitzgerald.  Indeed, it’s a great one, though fortunately I cannot personally attest to its veracity.  Nevertheless, it does touch on a concept I want to cover at a particular time of year — from about mid-January to the end of February.  It is during these weeks that most of us gradually give up our moorings to the previous year and then suddenly realize that we need to start planning to file our tax returns for it.  Also during this time, we receive our W-2 forms, 1099s and, if we hold a mortgage, our Form 1098.  With the help of one of my very capable colleagues at Guaranteed Rate, Michael Most, I’ve compiled some of the most frequently asked questions and answers regarding this document.

Q: What is a 1098?

A: The 1098, also known as the Mortgage Interest Statement, is a form issued by a mortgage servicer to the borrower which details the interest and expenses paid on a mortgage during a tax year. These expenses can be used as deductions on U.S. income tax form Schedule A, which reduces taxable income and the overall amount owed to the IRS. Tax disbursements are not included on the 1098. Contact your county tax authority for those figures.

Q: Where can I find my 1098?

A: Your annual 1098 comes from the company that services your mortgage loan (your “servicer”). Verify the lender has your correct mailing address if you are not living in the home. Most servicers allow you to access and print tax forms free of charge by logging into your account on their website. Guaranteed Rate provides 1098 copies from previous tax years upon request.

Q: When can I expect the 1098?

A: The IRS requires that tax documents are available on or before January 31st, which is the typical distribution date. The 1098 form is mailed to the address listed for the primary borrower.

Q: I have multiple borrowers on the mortgage. Do we all file the 1098?

A: 1098s are mailed solely to the primary borrower listed on the mortgage. If multiple borrowers are listed on your mortgage, you may decide among yourselves who will file the form. The form may only be filed once.

Q: Is there any way to get the 1098 myself?

A: Most long-term servicers allow you to access and print tax forms free of charge by logging into your account on their website.

Q: Can I obtain a copy of my 1098 from years past?

A: Guaranteed Rate can reprint and mail 1098 forms, which may take several business days.

Q: The 1098 I received doesn’t reflect all the payments I’ve made.

A: It is possible that you made payments to more than one servicer during the year. Please allow until February 15th to receive the 1098 from all servicers.

As always, please call or email me with any additional questions. For specific questions regarding taxation and the filing of your income tax returns, please be sure to consult your own tax professional.

The sun also rises, 

Rob Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 – (866) 934-7283

What Kind of Insurance Do You Need When You Buy a House?

Let me start by saying that I’m not in the insurance business, but that the insurance business is in mine.  And my business is helping home buyers and homeowners get a great mortgage.  So just what are the insurance requirements when you buy a home or go to refinance a mortgage on residential real estate you own in California?  Why does your lender care about the insurance coverage you keep?

Homeowner’s Insurance

Also known as “hazard insurance,” or “fire insurance,” this is the key policy you will be required to carry if you have a mortgage.  While the actual coverage may seem to be a clear benefit to you, there’s a mutual benefit for the lender.  After all, the home is both where you live and the collateral for the lender’s loan.  Without the home itself, it’s unlikely the lender would/could ever be paid back in the event of a loss.  By this logic, some homeowners who are “free and clear,” meaning they have no mortgage, will opt not to carry a homeowner’s policy.  In the event of a total loss from a fire, for example, they would be completely out of a place to live with no reimbursement for loss of its use.  Ouch.

Flood Insurance

If your lender determines that your property is in a FEMA special flood hazard area, you’ll be required to carry flood insurance.  Regulation requires that mortgage servicers impound your flood insurance premium even if your homeowner’s insurance and property taxes are not impounded (aka “escrowed”).

Earthquake Insurance

Earthquake insurance is not required by lenders in California, even though the risk of earthquake damage is real in many areas.  You can, at your discretion, purchase earthquake insurance but only about 10% of CA owners will choose to do so.

Title Insurance

When you buy a home and use financing, you’ll be required to get a “lender’s” title insurance policy.  This protects the lender from title defects and future claims against the title (which, like with homeowner’s insurance, could jeopardize their rights to the collateral).  You’ll notice that you’re also being quoted an “owner’s” policy, which is technically optional.  The vast majority will purchase this coverage too, and with good reason.  Should anyone claim an interest in your property down the road, the owner’s policy would provide you cover and the title insurer would step in to deal with the claim.  Worth noting is that the owner’s title insurance policy is in effect for the time you own the home.  The lender’s policy is in place for the time you hold the specific loan involved in the transaction.  If you refinance, you would purchase only a new lender’s policy.

Life Insurance

Like earthquake insurance, life insurance is not required when you take on a mortgage.  Also like earthquake, it may not be a bad idea.  Life insurance can help a surviving spouse pay off or better manage the payments on a loan in the event of the death of the other spouse, and you can make a very good argument that life insurance is an incredibly responsible financial purchase to consider at the time of home ownership.  We work with some great life insurance agents on a regular basis, so ask if you need a recommendation.

Private Mortgage Insurance

I am including private mortgage insurance or “PMI” in the insurance category because it makes sense that when borrower looks at the voluminous paperwork involved in buying a home, all of the insurance terminology starts to look the same.  But PMI is exclusively related to your mortgage and if you’re putting at least 20% down and/or not using an FHA loan, you may not have PMI at all.  So the best way to look at PMI is not as an insurance coverage required by the property, but one sometimes required by the loan.  You also do not need to “shop” for PMI like you would any of the other insurance types listed above, like homeowner’s.  Your lender should always attempt to find the least expensive private mortgage insurance available among the eligible providers.

So, to recap.  If you have a mortgage on a home, you will always need homeowner’s insurance and a lender’s title insurance policy.  You may be required to carry flood insurance.  Depending on your loan’s characteristics, you may also be required to have private mortgage insurance.  Owner’s title insurance, earthquake insurance and life insurance are up to you.  If you need help or perspective on these decisions and choices, I am always available to share my experience and insight.  We routinely work with many great insurance professionals because our industries are inevitably intertwined with the financing of real estate.  If you would benefit from a referral, please don’t hesitate to ask.

You’re in good hands, 

Rob Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Conforming a Little More Each Year

If you know me, you know that I don’t like to stick to convention.  I was the teenager who skipped college, moved to Hollywood and played rock guitar.  In my 20’s, I saved up vacation time not for sandy white beaches but instead for expeditions to the harsh mountain environs of the world’s highest peaks.  In my 30’s, I dove (literally) into the sport of triathlon — an endeavor, to quote my Aunt Marge, that would be something she’d “rather die a thousand deaths” before contemplating.  When I come to the fork in the road where straight and narrow diverges from the path less traveled, you can bet your best Yogi Berra’ism that I’m gonna take the latter.  So to write a blog post solely about the increase in conforming loan limits tests my own limits of conformity.  But for once, I am going to go along with the crowd and talk about pending changes coming to the San Francisco Bay Area, and across the state of California, in 2020.

Let’s step back for a minute and recognize that for the entire state (and country), the current conforming loan limit for a single family residence is set at $484,350.  In many of the higher cost, coastal counties of CA, we also have a “jumbo conforming,” “super conforming,” or “high-balance conforming” loan limit that exceeds this limit.  For example, here in my home county of Marin, that limit is presently set at $726,525.  Let’s look at how these will increase in 2020:

2019 Conforming Limit        2020 Conforming Limit

$484,350                                    $510,400

2019 High Balance Limit     2020 High Balance Limit     County

$726,525                                   $765,600                                      Marin

$726,525                                   $765,600                                      Alameda

$726,525                                   $765,600                                      Contra Costa

$652,050                                   $672,750                                      Monterey

$726,525                                   $764,750                                      Napa

$726,525                                   $765,600                                      San Benito

$726,525                                   $765,600                                      San Francisco

$726,525                                   $765,600                                      San Mateo

$726,525                                   $765,600                                      Santa Clara

$726,525                                   $765,600                                      Santa Cruz

$494,500                                   $494,500                                      Solano

$704,950                                   $704,950                                      Sonoma

As of the writing of this post (late December of 2019) we have already begun to implement the higher limits, so if you believe any of these increases will impact your purchase or refinance mortgage, please let me know.  I am a big fan of the higher limits because a conforming loan generally provides an easier qualification compared to a jumbo mortgage, and simply because we have higher home prices in the Bay Area should not be a reason to subject borrowers to a more burdensome loan process.  Yes, I realize that much of the country may not dance to the beat of my drummer.  But even though I don’t conform to their point of view, my idea of conforming is increasing, and that’s a step in the right direction.

We don’t get fooled again, 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Are Your California Property Taxes On Supplements?

Are you one of the 77% of U.S. adults who takes some form of nutritional supplement?  If so, you’ve contributed to the estimated $31 billion dollars of revenue that this industry generated in 2018.  So it stands to reason that California counties would want in on the supplemental action and they’ve figured out just the way to do it…

Seriously, taking on home ownership for the first time is a big responsibility.  And since many first time buyers are coming from a background of paying rent, it’s important that we, in the mortgage industry, educate them about how making a monthly rent payment differs from coming up with the new housing payment once the home is yours.  Specifically, buyers are no longer just responsible for their “payment,” meaning the rent or mortgage payment, but once owners, they also shoulder the responsibility of  homeowners insurance premiums and property taxes.  We’re going to focus on the tax piece and we’re going to take it a step further and detail what you need to know about supplemental property tax bills in California.

(Trying to) Keep It Simple

When you buy a home in California, your property tax rate will be determined, in part, by the price you pay for the home.  If you’re buying a previously owned home, this was also true for the seller, though the seller’s tax basis will almost certainly be different than yours.  Supplemental taxes effectively adjust the seller’s tax basis to yours, as the buyer, and a separate bill is often issued to “catch up” the new basis with the previous one.  Let’s use a rudimentary example.  If the seller paid $800,000 for the home five years ago and had a 1.25% property tax rate, his annual tax bill is $10,000.  If you buy the home for $1,000,000 and the tax rate is the same, your annual taxes will be $12,500.  Again, being overly simplistic, a $2500 supplemental bill will be issued to you, the new buyer, in the first year.

When Is a New Buyer Billed for Supplemental Taxes?

“When” is not easy to predict and will depend on the individual county.  After your purchase, the County Assessor will appraise your property and advise you of the new supplemental assessment amount.  Bear in mind that the assessed value is usually neither the same as your lender’s appraisal value nor the price you paid for the home, though the latter is part of what drives the tax basis going forward.  Before the supplemental bill is issued you can appeal the Assessor’s assessment and, if you will occupy the home, apply for a Homeowner’s Exemption, which will lower your basis slightly.  The bill, once issued will indicate the amount owed and the date the taxes will become delinquent.

When and How Do I Pay My Supplemental Taxes in California?

All supplemental taxes are payable in two equal installments.  The taxes are due on the date the bill is mailed and are delinquent on specified dates depending on the month the bill is mailed as follows:

  1. If the bill is mailed between July and October, the first installment becomes delinquent on December 10th of the same year.  The second installment becomes delinquent on April 10th of the next year.
  2. If the bill is mailed between November and June, the first installment becomes delinquent on the last day of the month following the month in which the bill is mailed.  The second installment becomes delinquent on the last day of the fourth calendar month following the date the first installment becomes delinquent.

A very important item to note is that supplemental taxes are most often the responsibility of the homeowner EVEN IF the owner has an impound/escrow account for their “regular” property taxes.  So all those who have a VA or FHA loan, take note.  Yes, your loan’s servicer may contact you regarding the supplemental bill and may provide options on how to pay them most efficiently given your servicing arrangement, but barring any notice or contact, the supplemental taxes are your responsibility and are IN ADDITION to your regular property taxes being handled through your mortgage payment.  And remember, supplemental taxes are only applicable to the first year of ownership.  Thereafter, the basis correction is factored into the regular tax bills and you will only continue to receive those.  In CA, the regular bills are issued in October, technically due November 1 for the first installment, with a late date of December 10.  The second installment is due February 1 and late April 10 and you can find more information about paying your “regular” property tax bill HERE.

If you find your property taxes on supplements, get in touch any time if you need to cut through the noise and better understand your responsibility as a new homeowner.

Pass the broccoli, Barry, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

The Yin and Yang of Mortgages for Business Owners

It is no secret that the self-employed have their share of challenges when it comes to getting a home loan. And why wouldn’t they? On one hand, their tax professionals spend hours maximizing their deductions and helping them “write off” every allowable expense and on the other hand, their mortgage loan advisor tells them they have to show more income in order to qualify.

But can these seemingly opposite or contrary objectives actually be complementary, interconnected and interdependent and come together to allow a business owner to get a great mortgage?  Is there a yin and yang relationship somewhere in this puzzle?

Indeed, there may be a solution for some of these borrowers. On both the purchase and refinance side, we have a jumbo mortgage program that allows the self-employed to qualify with bank statements instead of tax return income. We’ll look at 12 months of business and personal bank statements but we won’t request pay stubs, W-2 forms or personal or business tax returns. Here are the key points:

Who is Eligible for a Bank Statement Mortgage?

This program is a match for the self-employed business owner with two-year history of operating the sole proprietorship, LLC, S-Corp or C-Corp. We prefer to see 100% ownership of the business but we can make some exceptions to this guideline. We do not allow any major derogatory events (bankruptcy, foreclosure, short sale, etc.) within the last five years. Realtors, independent contractors and other professionals who receive a 1099 are also ideal candidates for this bank statement loan.

How Does a Bank Statement Mortgage Work?

We’re next going to look at 12 months’ worth of business bank statements and we’re going to get a sense of the business deposits over that period of time. We’ll apply a 50% expense ratio to derive our qualifying income. So, for example, if the business shows $40K of monthly deposits on average, our business owner and borrower now has $20K per month of qualifying income. Simple as that, except we exclude any windfall deposits, transfers to and from accounts or anything other than legitimate business deposits.

What Else Do I Need to Know?

We will permit all occupancy types (primary, vacation and rentals) and we’ll allow loan-to-values (LTV) up to 75%. Interest-only payment options exist and our maximum debt-to-income (DTI) ratio is 47%, because this is a non-QM program. Simply, you have more flexibility under these guidelines than under the stricter qualifying parameters of a qualified mortgage (QM). Best of all, and worth repeating, we will not request your tax returns and we don’t need to see a profit and loss (P&L) statement for the business — the bank statements are our path to inner peace and harmony.

Bank statement qualification mortgages can open the door for the hard working business owner who has heretofore had little luck getting a hefty mortgage payment to fit into his skinny tax returns. If you’d like to know more about this program today, get your ticket at the station, get in touch and I’ll be happy to help.

Confucius say, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What is APR on a Mortgage?

Caller:  “Can you tell me what your APR is?”

Me:  “Sure.  Can you tell me what APR is?”

Caller:  “Uhhhh…”

So this really happened.  Many times, in fact.  This is your garden variety, otherwise-intelligent consumer trying to shop for a mortgage.  This is someone earnestly trying to figure out the best deal on a home loan.  And yet, most often, they have absolutely no idea what they are doing when it comes to the annual percentage rate, or APR, on a mortgage.  But I don’t blame them.  The point of this blog is not to make anyone look or feel stupid.  In fact, it’s the opposite.  APR was meant to help, but I have experienced that our regulators and our industry have done a poor job of explaining how it works and how one calculates it.  If we reduce it to plain language and easy examples, APR starts to makes sense and, most importantly, can be put in its rightful place in the shopping process.  Spoiler alert — APR is not the be all, end all of mortgage research.  As we’ll see, it’s just a numeric representation of costs —- costs hat can be deduced elsewhere in the loan documentation you’ll receive.  But let’s get started on APR.  It is worth understanding.

Tip #1

APR is the “price per pound” (PPP) of the money you are borrowing.  If you go into a supermarket with the lofty objective of buying sugared breakfast cereal at the lowest price possible, you might just come across boxes of different sizes (and prices).  How will you determine the best deal?  You will reduce the cereal to “price per pound,” or in this case, the price per ounce.  If a 32oz. box costs $5.99 and a 24oz. box costs $4.99, some basic math tells us that the per ounce cost for the 32oz. box is $.19,  For the 24oz. box it is $.21 per ounce.  You’d be better off buying the larger box.

Now let’s say that you’ve decided to step up your game from frosted flakes to four bedrooms.  You need a mortgage and Lender A tells you that you can get $400K 30-year fixed rate mortgage at a rate of 4.000% with a cost of $3000.  Lender B says you can get a loan of the same size for 3.875% at a cost of $7000.  How do you determine the better deal?

Tip #2

APR is a lot like triangles.  Remember in high school algebra (sorry for the flashback…) we learned that the angles of a triangle must always equal 180 degrees?  Remember how we were told that if one angle decreases, so too must another increase?  Well, this is APR.  Let’s go back to our example above:

  • Note Rate:  4.000%
  • Loan Amount:  $400,000
  • Payment:  $1910

Follow me so far?  Good.  Now let’s introduce cost.  If it costs you $3000 to get $400K, then the “net” funds that change hands will really be $397K (yes, you still get a loan of $400K…).  But since you have a fixed rate loan and a payment of $1910 that cannot change, what would your rate need to be to produce a payment of $1910 at a loan amount of $397K?  The answer is your APR, and in this case it is about 4.07%.  Now, what about our other option from Lender B?  Will APR be higher or lower?

  • Note Rate:  3.875%
  • Loan Amount:  $400,000
  • Payment:  $1881

Again, let’s do our “net” math.  You have $393K changing hands ($400K – $7000) and a fixed payment of $1881, so your APR is 4.02%.  If you are looking for the lower APR, you found it.  But if you are looking for the loan with less costs, the 4.000% Note Rate is perhaps the better fit.

Tip #3

You always make your mortgage payment based on your Note Rate (the actual rate) and not the APR.  I think this one confuses a lot of would-be borrowers.  APR is an aid in the shopping process.  It is never the basis for your monthly payment.

Tip #4

Trying to determine the APR on an ARM loan is an exercise in futility.  By definition, ARM loans will have a period of time where the interest rate is subject to a combination of the index plus a margin.  The index will change during that time.  Because of this, creating a static APR calculation with accuracy is impossible.  If you are weighing an ARM loan versus a fixed program, you will have to review a cost itemization or Loan Estimate to calculate total costs for each option.  There is no shortcut.  While on the topic of things that can skew APR, PMI is another one.  If you’re weighing two loans with PMI, or one with and one without, know that PMI can wildly increase APR to the point where it ceases to be an effective shopping tool.

Tip #5

Don’t lose sight of what you’re attempting to do with APR.  Namely, seeking to determine how much it costs to get any interest rate on any loan.  If you review all of the above and still don’t feel confident, you are not alone.  To make matters worse, there is no real uniformity in what costs and fees get included in APR.  One lender to the next, you’ll see some variation.  But here too, a rule of thumb should be that a lender should include any fee in the APR that could not otherwise be avoided if the borrower paid cash for the home.  For example, an appraisal.  You need that for a mortgage process, you do not if you pay cash.  So an appraisal fee should be included in APR, etc.

We’re here to help with any questions about Note Rates, APR and the costs and components that impact your mortgage pricing.  Smart shopping is always a good idea.  Thinking that APR accomplishes that goal alone is not.

Don’t know much about algebra, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Can You Add Remodel Costs to Your Mortgage?

One homebuyer niche I know extremely well is 10% down payment jumbo mortgage financing.  We have a good number of prospective homeowners in California, especially here in the San Francisco Bay Area, who earn strong income, who have an excellent credit profile but who just do not yet have the full 20% down payment saved for home prices that are, compared to the rest of the country, very high.  These buyers have certainly not failed and they are not out of luck either.  Once they understand just how competitive an 80/10/10 or other 10% down solution can be, they are often back out on the market in no time, and with renewed optimism.

It is here that they will sometimes find their next challenge, though it is not one that is limited to just a 10% down payment structure.  Several of these buyers will come across a property that will need immediate renovation, remodeling or repair — assuming they are able to have their offer accepted.  Their next question to me will be “Can you add the cost of remodeling or renovation into the mortgage?”  The answer involves several concepts so let’s address them one by one.

Lenders use the lesser of the appraised value or the purchase price to determine loan-to-value (LTV).

If we take our “cosmetic fixer” and have an appraiser give it the ol’ once over, will the appraised value match or exceed the price the buyer is paying for the home?  If the answer is “yes,” we don’t have any issue, but if the answer is “no,” we, as the lender, are going to use the smaller number to determine the loan-to-value (LTV).  Let’s say the buyer is in contract to buy the home for $1MM.  The buyer is financing 90% of that price, or $900,000. Now let’s say the property appraises for $950K.  Again, we can finance 90% of the lesser amount so in this case that’s $855,000.  Remember that if the buyer was planning to “put down” $100K in the original example, and if the contract price does not change, the buyer can ONLY finance $855K but is still buying at $1MM.  This now implies a down payment of $145K. More on this next…

You cannot finance more than your loan program’s LTV threshold.

In our example just above, we are forced to increase the down payment because we would otherwise have an LTV (or “combined loan-to-value”) of more than 90% and our program guidelines may not allow for that.  I’m not saying that no loan program can exceed that threshold, just that our buyers were presuming their financing would meet a 90% limit.  When the appraised value comes in lower than the purchase price AND an LTV threshold is crossed, like at 20% down or 10% down, the buyer’s financing will need to be adjusted.  Sellers often recognize this and may be concerned about accepting an offer if they feel a low appraisal would tank the buyer’s loan approval.  This is the logic behind a 30% down payment appearing more attractive than a 20% down payment, for example.  If a buyer puts down 30% and the appraisal comes in low, chances are that buyer can still keep the existing terms of his/her loan (maybe the LTV goes to 72% or 73% — but that doesn’t blow anything up).  On the other hand, if a buyer is getting a loan with 20% down and the property doesn’t appraise, now that buyer either needs to bridge the difference in cash, get a small second mortgage (if permissible by the first mortgage guidelines) or take PMI (if available).  You can see why this might tip the seller’s scales in favor of larger down payment offers.

The property must appraise “as is.”

Both of our examples above assume that the property is in sufficient condition to appraise “as is” and not subject to repairs and completion.  The status of the report is indicated via checkbox.  If the property’s condition requires extensive rehabilitation or has obvious health and safety deficiencies, a conventional loan may not be an option at this time.  That brings us to our next point…

 

There are programs that may specifically address remodel and/or construction.

This is the province of the construction loan, the rehab loan, the FHA 203K, etc.  We’re not going to cover those here but know that when you’re dealing with a construction loan, the approach to financing is fundamentally different.  Whereas an “end loan” or a “conventional” loan will work off of the appraised value, a construction-type loan will look to completed, repaired or rebuilt value to set LTV.  But here, understand that you’re not just getting a larger loan and a “get out of jail” card.  The lender needs to know the plans, the scope of work, the schedule of completion, etc.  In other words, you’ve got not only a loan on your hands, but a project too.  For the average buyer just looking to purchase a home, a construction loan comes with an additional, and serious, set of considerations.

So getting back to our original question, “Can you finance the cost of renovation or remodeling into your purchase money mortgage?”, the short answer is “No.”  The better answer is that “it depends,” but we must recognize that what we’re really doing in most cases is preserving the buyer’s cash.  Where a construction loan program is not being used, this is often the best outcome to which we can aspire.  But remember, for any home loan program you select, you cannot finance more than your maximum loan-to-value or combined loan-to-value (LTV or CLTV) and your loan officer can guide you on these.

This is a simple concept that is often confusing and difficult to grasp in the real world, so don’t be embarrassed to ask questions and drill down (no pun intended) on the math.  Just because you may not be able to finance future improvements now does not mean that the home is not a great fit for your family, your future needs and your budget.  And like always, a sound understanding of concepts will go a long way towards helping you make the best decision.

Sleeves rolled up, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283