Errors of Intent

Watching the world grapple with a pandemic has had a profound impact on my heretofore limited ability to count blessings.  Yes, we are sheltered in place, but my immediate family is presently in good health.  And though I suspect the coming days, weeks and months will be disrupted by yet unknown challenges, I am grateful that the hull of my career has been hewn solidly by countless hours of hard work.  I take deep appreciation of the experience I gained during other times of hardship like 9/11 and the Lehman collapse. Though I worry about the well-being of my 84-year old father, he’s seen great returns on the investment he made instilling in me a zero tolerance policy for BS and hypocrisy and a stern warning to never take advantage of others through my expertise, privileges, resources or place in life.

No doubt the developments of the last few days have come at breakneck speed, and there I was having a heart-to-heart with a client in process.  This individual was clearly stressed under the weight of making a critically important decision in a market shifting under our feet.  As I grappled with several of his most pressing concerns, I wondered to myself, “What if I have it wrong?”  “What if this time is different and my advice doesn’t apply here?” “What if we just don’t know?”

In my mid-20’s, I was fortunate (again) to have had an astute mentor in a job that forced me, for the first time as an adult, to be accountable for decisions that impacted an operation.  I had screwed up and I was scared and embarrassed.  But, I also had an out.  My subordinates could have easily gone under the wheels of the bus this time.  Right about the moment I was stewing in my own panic, my boss burst into my office and short-circuited my fraying wires, “What the hell happened here?”  Reflexively, I told the truth.  I apologized — I looked him in the eye and said, “Dude, do what you gotta do. I accept responsibility.”  He only asked one more question:  “Did you intend to do that or was it a mistake?”  Never one to easily concede perfection, I had to hesitate but admitted that, yes, it was not only a mistake, it was my mistake.

We only had one more discussion on the topic — the most impressionable one.  “Rob,” he said, “I’m pissed about the whole damned thing.  I’m not gonna lie.  But it had to be either your mistake or my mistake for completely misjudging your character.”  He continued, “Errors of execution can be forgiven.  Errors of intent cannot.  Get back to work.”  With that, the conversation and the ordeal were put to bed.

So here we are.  Real estate pros in the middle of a global pandemic. None of us have seen this movie before.  We can’t expect all our decisions from this point will be perfect.  We will make mistakes, we will dispense advice that turns out to be bad.  It’s inevitable.  And in this time of lockdown and reflection, I am reminded that when my future self looks back at any detrimental advice I may give, will it have been an error of execution or intent?  Whose interests did I put first?  We don’t get to pick the times and circumstances of the crisis that finds us.  We don’t get to bend reality to our whims.  We can’t shirk the heavy responsibility and duck the tough questions now, when we are needed most.  In every decision we make for those who entrust us, who are in our care, who rely on us, we are wholly responsible for our intent.  There is no margin of error here, and no forgiveness for getting it wrong.  Now, get back to work.

Take care and stay safe,

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

Part-Time Jobs, Second Jobs and Your Mortgage Application

I remember thumbing through the Recycler in Los Angeles when I first moved out there as a teenager.  Living on a shoestring budget, I was especially intrigued by the ads that promised the ability to make thousands per month while sitting in the comfort(?) of your home.  In my mind, that meant I could keep my day job, practice guitar eight hours and day and still have some other check rolling in without too much trouble.  Who wouldn’t like that?  I never actually pursued any of these trinket-making, envelope-stuffing, part-soldering side hustles, but the reality of part-time income, either as a primary or supplemental source of monthly revenue, is appealing to many and necessary for some.  But what happens when these individuals make a mortgage application and attempt to qualify with some or all of this income?

Part-Time Income

Just because you don’t work a full 40 hours a week does not mean you are disqualified from getting a great home loan.  Maybe you have a seasonal job or a position that does not require a set schedule.  If you have a two-year history of earnings in this role and you can document this with paystubs, W-2 forms, tax returns and a verification of employment, you’re in business in our eyes.  Consistency is key and the more you have of it, the easier it will be to qualify your income from a part-time position.

Secondary Income

In today’s gig economy, many individuals earn extra income through a secondary position, such as driving for Uber or Lyft, for example.  Still others, because of a highly refined skill in technology and/or medicine might find themselves effectively working a second job due to their expertise (and assuming a non-compete clause doesn’t prevent them from doing so).  Here too, even if the income earned is substantial, we will generally not qualify it unless there is at least a two-year, documented history of its earning.  We must also show that the secondary position continues, so we would verify this employment with the employer just as we’d typically do for your primary job.

Burning the Candle at Both Ends

Here are some of the things that will disqualify, or at the very least make challenging, the use of secondary or part-time income.

  • Payments in cash.
  • Irregular schedules.
  • Multiple secondary jobs that do not appear stable.
  • Part-time positions that do not appear to be ongoing.
  • Second jobs that pay you as an independent contractor (1099).  These technically create a “self-employment” situation where we would need a two-year history of tax returns which support consistent self-employed income.

This is not a complete list, but it will give most a good sense of whether their scenario might get consideration by a mortgage lender and allow them to use the income to help qualify for a home loan.  If you have secondary or part-time employment and you need it to help you purchase or refinance, get in touch at any time and we’ll be happy to assess your situation and advise on what’s possible.

Help wanted, 

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

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

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

Qualifying for a Mortgage? Don’t Step in a Large Deposit Mess

By far, one of the most confounding experiences when one goes to obtain a mortgage is the sourcing of “large deposits” on a bank statement.  This is our industry’s gift that keeps giving.  However, there are some ways to avoid inadvertently stepping into trouble and like with most things in life, an ounce of prevention is worth a pound of cure.

What Is a Large Deposit?

Most of the time a mortgage lender will define a large deposit as a non-payroll deposit that exceeds 50% of your gross monthly income.  So, let’s say you provide a bank statement to us.  We see an ATM or teller deposit for $6175 and your gross monthly income is $10K.  You can expect we will ask to know what the deposit is and where it came from.  Different lenders and different programs may have different thresholds, and there is subjectivity to this as well.  With a borrower who makes $10K a month, it’s not unreasonable to think an underwriter might ask to know about a non-payroll deposit of $4750.  It’s happened before…

What’s the Big Deal with Large Deposits?

Remember, at the end of the day, your lender is assessing your creditworthiness and your ability to repay the loan.  If the money you plan to use as a down payment is not derived from savings with a documentable history, your lender will want to know if the money coming into your accounts is from a legitimate source.  Or, is it a loan?  If the latter, does it now require a monthly payment we must factor into the debt-to-income (DTI) ratio?  The large deposit test creates a firewall for the lender where a buyer who otherwise could not afford to buy gets “propped up” by family, friends or undisclosed creditors just prior to purchasing the home.  And it’s precisely these question marks that create the additional risk for the lender.

Reality Sets In

Let’s face it, if you’re planning to buy a home, you should be planning.  If you’re going to be moving money to your accounts from other sources that you know will invite questions, it is best to allow these funds to “season” in your account for a period of time that exceeds the lender’s documentation requirements (usually two months).  After all, I’m not going to assume all large, non-payroll deposits are illicit drug deals.  There can be a lot of honest bank activity that is almost impossible to source.  If you know that you’re going to be relying on this kind of funds to close escrow, get it into your accounts long before you plan to make a mortgage application.

What About Gifts?

Gift funds are allowed in most transactions and within guidelines, but practically every mortgage lender will ONLY recognize gift funds from a family member.  Where large deposits that are “gifts” get into difficulty is not necessarily the sourcing, but the source.  Sometimes, the family relationship is not there.  How do we know who is the donor?  Simple, we require a gift letter that will outline the relationship.

In the mortgage industry, two, clean months of bank statements with no large deposits are our equivalent of Eureka.  I’m convinced that if every potential buyer or borrower knew this in advance, we’d drastically cut down on the number of bad customer experiences.  The worst outcome for our clients is, of course, that when we source a large deposit from another bank account, that origin account also has large deposits, and so on.  You can see how this would get less and less fun…quickly.  So, understand this basic concept and call with any questions.  If we can help you plan for a smoother transaction, we’re happy to be of service.

Where’s the beef, 

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 Haunted Loan Process

As we wind our way closer to Halloween, I wanted to cover a few of the graveyard variety hobgoblins of the mortgage process.  You know, the things our clients don’t tell us at the start and that later come back to haunt their home loan transaction like so many nightmares on Friday the 13th.  The goal here is not to scare the prospective borrower, but instead to provide fair warning about the actions you can take or avoid at the start of your application that will help you close your loan on time and without undue stress.  Let’s peek-a-boo at some of the most common loan zombies that come out when the moon is full:

  1. Amending a tax return.  It can be such an innocent mistake.  You file a tax return and later amend it for some reason.  When we ask you for your tax records, you provide us with your Forms 1040, but forget there is a 1040X out there as well.  We order an IRS transcript (Form 4506T) and our numbers on the tax return don’t match the numbers on the 4506T.  Now, you’re not in trouble with us or the IRS, but we do have to underwrite to the amended return.
  2. Beginning or not disclosing ongoing work on the property.  Open walls, torn up flooring, room additions underway, no fixtures in a bathroom, an empty swimming pool, etc.  This is not a complete list, of course, but always tell your lender if your home is in any way undergoing work (or will be) when an appraiser comes out.  In general, you will not be able to fund your loan until all work is complete and a reinspection by the appraiser confirms such.
  3. Changing or leaving jobs, or giving notice.  Expect that every lender will complete a prior-to-funding (PTF) verification of employment.  If you are no longer on the job just before close, or if you’ve signaled your intent to leave the job, we may have a major issue.  In short, the employment by which you qualify for the loan is the one that needs to be in place when you close.
  4. Co-signing on a debt for someone else.  Most often, co-signed debts will show up on the credit report, but if they are new or unreported to the credit repositories, we often have to factor them into the debt ratio (DTI) at that time.  The conventional wisdom is to never co-sign for anything.  In reality, life is more complicated than that and it happens.  Where it does, tell us up front.
  5. Disputing a credit item.  It may seem like the right thing to do and it may make you feel better about sticking it to a creditor who’s done you wrong, but disputing a credit item while in the loan process can take on a ghoulish character.  The advice here is don’t do it until we’re funded, but at the bare minimum, let us know when you’re thinking about it.
  6. Failing to disclose a property you own.  Our borrowers often believe that if they own a property free and clear, there’s no way we’d know about it (and more importantly, why would it matter?).  But remember that real property ownership means there’s county records and we can find those.  And about the fact that it’s free and clear?  Good for you but it still doesn’t address property taxes and insurance?  Those go in your DTI too.
  7. Moving unsourced money into your bank accounts.  This one has stopped more purchases of brick and mortar than Amazon.  When you go to buy a home, know that we will look back at least two months (via bank statements) to confirm that all of the money for your down payment, closing costs and reserves is accounted for and meets guidelines.  If you try to move money into your account, we will often question the deposit.  So it’s essential we identify, reveal and document how you plan to close the transaction when it comes to your money.
  8. Not making a mortgage payment when refinancing.  “But I thought we would close by then…”  Famous last words.  Remember, when you are in the loan process, you are not done until you have keys in your hand or, in the case of a refinance, your new loan is funded and recorded and the old loan has been officially released.  During that time, it’s imperative you continue to make your regular mortgage payments.  “If there is any doubt, there is no doubt,” goes the old mountaineer’s saying.  Keep your existing mortgage current at all times.
  9. Recurring payments for a loan or other obligation.  If you have undisclosed debts or payments and we see a recurring withdrawal from your bank accounts, expect that we will ask.  If the item is discretionary, it’s likely no issue, but if it is an obligation we will want to consider it in your debt ratio.  The sooner we find out about it, the better.  So let us know at the outset.
  10. Taking on new debt before closing escrow on your purchase.  Early in my career I had a young, homebuying couple sign their loan documents on a Friday afternoon.  Jubilant with their new purchase, they spent the weekend shopping for furniture and outfitting their new home, including opening a store credit card where they proceeded to take advantage of the new customer discount on their large purchases.  On Monday, when confronted with the question of whether they took on any new obligations over the weekend, they said yes.  Their rationale?  “Oh, we closed when we signed on Friday.”  The lesson here is that it’s not entirely their fault.  Our industry can do a better job of explaining the closing process and when borrowers are “all clear.”  I learned a lot from that experience and have used the lessons ever since.  On a purchase transaction, you are not closed until you are signed, funded and the deed is recorded with the county.

Look, some of the above may seem funny or obvious.  But the reason I’ve listed them is because they happen.  Over and over and over.  We’ve dealt with each and if you find yourself in a bind as a result of any of them, don’t hesitate to get in touch.  We don’t stand in judgment of how things happened and instead we focus on solutions.  Let me know if I can be of service today.

Trick or treat, 

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