MORTGAGES

A Tough Time for Self-Employed Borrowers

The New York Times

By BOB TEDESCHI

Published: May 12, 2010

MOST borrowers are facing a much tougher mortgage environment than a few years ago, but for those who are self-employed or own small businesses, maneuvering through a loan application can be even more arduous.

Before 2008 these borrowers, many of whom have difficulty documenting their income, often used what are known as stated-income loans. Lenders focused on credit histories and earnings estimates, circumventing the need for pay stubs or W-2s.

But during the mortgage crisis, stated-income loans became known as “liar’s loans,” because some borrowers falsely inflated their incomes, and qualified for more than they could afford.

Today, stated-income loans have nearly disappeared. Those still available through regional lenders like Hudson City Savings Bank come at a cost: interest rates around a quarter of a percentage point higher than conventional loans and down payments of at least 30 percent.

The self-employed borrower’s only choice, mortgage brokers say, is to submit two years’ tax returns and hope that they qualify for a conventional loan.

That would not be a problem, the brokers said, if all self-employed people filled out their tax returns conservatively. But in this economic climate, the self-employed have been more likely to lighten their tax liabilities by taking business deductions, thereby lowering their official income levels, as well as the likelihood of qualifying for a loan.

“You have to be more conservative about how you claim your deductions, or how you approach unnecessary purchases for the business,” said Robert Duquette, the president of the New York Association of Mortgage Brokers.

Mr. Duquette says that self-employed borrowers will have no trouble qualifying for loans if they have significant cash, as well as credit scores of at least 700, and stable and significant profit for the previous two years.

But many small-business owners, hit by the recession, are showing losses on their income tax statements.

“Of course, a borrower can make an argument for extenuating circumstances, like reserve duty for a few months, or a temporary hospitalization,” said Regina Mincey-Garlin, the president of RCG Mortgage Solutions in Montclair, N.J.

Mr. Duquette of the New York Mortgage Brokers Association said the mortgage crisis had hurt small-business owners more than others. “Everyone who’s getting income from places other than salary and wages is getting hit harder than everyone else,” he said, “because they’re being scrutinized more carefully.”

And those who have only recently started a business — perhaps after a layoff — may face even greater difficulties, he added. During the recession, many companies laid off workers, hiring them back on a contractual basis. Because these people have no long-term history of stable earnings, Mr. Duquette said, lenders often reject their applications or impose higher rates.

Still, self-employed applicants shouldn’t give up hope, said Debra Killian, the president of Charter Oak Lending, a mortgage broker in Danbury, Conn. Many people wrongly assume they cannot qualify for a loan at all, she said, “but 30 percent of the time — maybe 40 — they’ll qualify. They may be frustrated at all the documentation we ask them to provide, but they can still qualify.”

Small-business owners considering whether to qualify a purchase as a business or personal expense on their taxes, Ms. Killian said, should do the math.

If a business owner shows too little net income to qualify, say, for a $300,000 mortgage at 5 percent, and instead qualifies for a 5.25 percent loan, the monthly payments add up to an extra $5,520, roughly, for the first 10 years of the more expensive loan.

“If you save yourself a few thousand dollars in taxes in a year by taking those extra deductions,” Ms. Killian said, “how much will that cost you on your mortgage, or your ability to even get a loan?”

My feedback: I HAVE heard of stated income products w/as little as 20% down. I have yet to see one of these lower down payment products close, however there are encouraging signs of greater existence of these types of exotic loan products re-emerging. Call me if you have questions, or need to be guided in the right direction. This IS quite a challenging lending market for the self-employed. The name of the game is reducing one’s taxable income by taking as many legitimate business deductions as possible, yes? However this strategy definitely hurts one’s ability to qualify for a loan, as full documentation loans take into account the income shown on tax returns AFTER deductions are eliminated. Perhaps new loan programs will take into account this unique hurdle for the self-employed, once the market stabilizes and loan defaults are lessened. I, for one, am definitely hoping for the best. Bless! C

By James R. Hagerty

Why is there such a fierce debate about whether the housing market is slowly healing or heading for another free fall? Partly because no one can estimate with much confidence how many foreclosed homes banks need to sell or how fast they are getting rid of all that property.

A huge chunk of today’s housing supply comes from homes that have been acquired by banks or mortgage investors through foreclosure, plus those that are being offered by people who hope to avoid foreclosure by doing “short sales,” selling their homes for less than the mortgage balance due. The National Association of Realtors estimates that such “distressed” situations accounted for 35% of home sales in February and March.

The latest heroic attempt to tally how many foreclosed homes are available for sale comes from analysts at Barclays Capital in New York. They estimate that banks and mortgage investors including Fannie Mae and Freddie Mac owned 480,000 homes at the end of February. That’s far lower than previous estimates. Barclays explains that it has acquired more data on mortgages and refined its methods for analyzing foreclosure trends. Under the bank’s previous methods, the estimate for February would have been more than 600,000.

Estimating the inventory of foreclosed homes is tricky because thousands of banks and others that own the properties disclose those holdings in varying ways, if at all. RealtyTrac Inc., another data provider and one of the few other firms that regularly makes such calculations, estimates that banks and mortgage investors own 758,000 foreclosed homes.

So we have a pretty big gap. Is it 480,000 as Barclays thinks, or 758,000, as per RealtyTrac? Tom Lawler, an independent housing economist who tracks reams of housing data when he isn’t tending the livestock on his farm near Leesburg, Va., figures the total is more than 550,000 but probably less than the RealtyTrac estimate.

“What is truly disturbing,” Mr. Lawler wrote in his daily housing-market commentary Wednesday, “is that given all of the economic data the government tracks, the sector it appears to track the worst is…the housing market!  Why is it that the government has not deployed more resources to better track and report data on the housing inventory, households, home sales, home prices, and, of course, foreclosures and the number of homeowners who have lost their home to foreclosure?”

(That’s an especially good question given that the U.S. government has a bit of exposure to the housing market. Inside Mortgage Finance reports that mortgages backed by government-related entities – Fannie Mae, Freddie Mac, the FHA and the VA – accounted for more than 96% of home loans originated in the first quarter.)

Whatever the number of homes that banks, the federal agencies and private mortgage investors own now, it’s likely to increase. Barclays expects the inventory generally to rise over the next 20 months, peaking at 536,000 in January 2012, and then decline gradually.

To get a rough sense of how many more households will lose their homes to foreclosures or related actions, Barclays tallies what it calls a “shadow inventory,” consisting of homeowners 90 days or more overdue on mortgage payments or already in the foreclosure process. At the end of February, 4.6 million households were in that category.

Barclays expects 1.6 million “distressed sales” of homes – mainly foreclosures or short sales – both this year and in 2011, then a slight decline to 1.5 million in 2012. Last year, Barclays estimates, such sales totaled 1.5 million. Around 30% of all home sales this year and next will be foreclosure-related, forecasts Robert Tayon, a mortgage analyst at Barclays, who says that would be only about 6% in a normal housing market.

Barclays expects U.S. home prices on average to fall another 3% to 5% over the next couple of years, adding to a decline of about 30% already recorded since 2006. That forecast assumes a gradual improvement in the unemployment rate to 8% within the next two years from 9.7% in March. The home-price picture would worsen if job growth sputters or banks “push homes through the foreclosure pipeline faster than expected,” Mr. Tayon says.

Efforts to avert foreclosures by offering many borrowers lower payments have slowed the flow of homes into bank ownership. In some parts of the country, such as the Las Vegas area and Orange County, Calif., that has left bargain-hunters frustrated by what they see as a shortage of bank-owned properties in attractive neighborhoods.

In the Las Vegas area, foreclosed homes accounted for 56% of sales in March, down from 73% a year earlier, according to MDA DataQuick, a research firm. – End of Article-.

So, what thinks ye? No one knows exactly when and if banks and private investors will dispose of the bulk of their foreclosed inventory…current signs show a trend of  banks disposing of foreclosed inventory in large chunks to (often all cash-paying) private investors, though foreclosed properties are still prevalently found on the open market today. My prediction is that we will continue to see a mix of the two and that foreclosed homes WILL continue to affect home values, preventing runaway appreciation in the near-term, despite low inventory. They will of course continue to attract first time buyers and investors alike, who often engage in bidding wars that may very well drive the prices of foreclosed inventory to at or near current market values. One thing’s for sure: THESE be interesting/unprecedented times! CT

A home in Palo Alto. Pending sales of previously owned homes rose 21.8% in the Midwest, 9.2% in the South and 9% in the Northeast in February, but fell 4.8% in the West in February, according to the National Assn. of Realtors. (Paul Sakuma / Associated Press / April 5, 2010)

By Alejandro Lazo – for the Los Angeles Times

April 6, 2010

The number of previously owned homes placed under sales contract surged 8.2% in February, according to data released Monday, the first sign that the government’s extended tax credit for buyers may bolster sales this spring.The National Assn. of Realtors said Monday that its pending home sales index, a forward-looking measure based on contracts signed, rose to 97.6 in February from a downwardly revised 90.2 in January. That was 17.3% above February 2009, when the index was at 83.2. A reading of 100 is equivalent to the amount of activity hit during 2001, when home prices began their record climb and when the data were first measured.”I don’t expect a vigorous market resurgence or a sharp, new rise in home prices,” said Michael D. Larson, a housing and interest rate analyst with Weiss Research.”Foreclosure inventory will continue to be doled out into the market over the next year or two, taking some vigor out of this recovery,” Larson said. “But it will be a recovery nonetheless, one warmly welcomed by battered home sellers, banks and home builders.”The Midwest notched the biggest increase, rising 21.8%. Pending sales climbed 9.2% in the South and 9% in the Northeast, but fell nearly 4.8% in the West.

Sales nationally have plummeted for three consecutive months beginning in December after surging last fall as buyers rushed to take advantage of the government’s credit for first-time purchases before its initial November expiration. Congress extended that incentive of as much as $8,000 for first-time borrowers through the end of April and expanded it to include as much as $6,500 for some current homeowners. Contracts signed typically lead to closings in one or two months, although distressed sales such as foreclosure sales and short sales often can take longer.

Yes, (Candy here)- in my experience, short sales and sometimes foreclosures, can take much much longer than the typical sale. Have questions? Think it might be the right time to invest in a discounted property? Email me!

Thanks & bless,

Candy

Love & peace!!!

Candy

Hi loves! It’s time for another exciting giveaway courtesy of www.EarthCafetogo.com! To have one of these award-winning, incredible HEALTHY gluten, dairy, and refined-sugar free living cakes shipped to your door, leave a comment below with:

a) a question about the real estate market    or

b) a comment about your prediction as to where the market is going.

If you would like to earn extra entries, become a friend of your holistic agent on twitter: www.yourholisticagent.com/twitter or facebook www.yourholisticagent.com/facebook (or both!) – post this contest to your facebook or twitter profiles (& email me a link), or re-tweet my twitter announcement. Any of these actions will result in an extra entry and there are no limits to how many times you can enter, re-tweet, post, or comment below. The winner will be selected at random on Wednesday, March 31st.

As always I’m grateful for your referrals as they are the lifeblood of my business! If you know anyone looking to buy, sell or invest in real estate in any of the 50 states, I can help them out and of course if they’re in the Los Angeles area, I can help them personally and provide the best service along with life-enhancing goodies, inspiration, literature, and of course, dedicated real estate know-how. Good luck with your entry & talk to you soon!

Candy

“YO SOY LIZ”!!

Congrats ms. soy!! I will be emailing you directly to gather your information so you may receive your prize! To everyone else, thanks for participating!! Worry not, there will be more giveaways to come, so please spread the news! Also, please keep your real estate questions coming! I intend to post & answer them here as well…just as soon as things slow down a bit, that is. If anything’s burning, & you need help buying or selling, do not hesitate of course to contact me directly and we’ll absolutely make it happen!

Again, “yo soy”, congrats! Up next, you guessed it! Another world’s best healthy cheesecake giveaway, courtesy of Earth Cafe….

xoxo C

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Here’s the first question asked in our New Year’s Cheesecake giveaway. I thought it was a darn good one, so I’m posting the question along w/my response, & Bank of America loan officer Michelle Bennett’s response as well. There were so many great questions asked- I will be answering them on an on-going basis, (in between working on deals for my faaaaaabulous clients, so please bear with!) but please keep sending them!

From the Lundblades:

How soon after we buy a home should we refinance. Some of these companies tack on all these charges and we are not sure it would even be wise to go for a lower interest rate with all the fees they tack on to the loan unless we plan to be here in this house for a long time. What do you think?
Also, would it be wise to buy another home in a few years and rent out the current one or would/do large mortgages hurt our credit?

My response:

Lundblades-this is a prime question for a mortgage banker, I’ll see if I can get 1 of my fave experts to sign on to answer it from their point of view! From my opinion however I can tell you that it depends on the amount of fees you might pay for re-financing & always it depends on how LONG you intend to hold the property. If you know these two numbers, you can come up w/a mathematical formula instantly to tell you whether it’s a good move or not. Ask your loan officer to give you a GOOD FAITH ESTIMATE outlining all costs & fees for the refi as a 1st step! Conventional wisdom says that it usually makes since to refi into a lower rate if you plan on staying in the home at least 5-7 yrs. Do you plan to own your home longer than the amount of time it would take to have the savings be absorbed by the cost of the refinance?
To your second question, as a person who believes wholeheartedly in r.e. investment I say YES it would be wise to buy another home & rent your own IF you don’t mind being a landlord & if you’re ready to build a r.e. portfolio & benefit from the rewards as well as accept the challenges (like vacancy, management of property, etc.). NO, having large mortgages or 2 or multiple mortgages should not (significantly) impact your credit (ESP. if your mortgages are in the form of a trust deed vs. an equity line of credit, potentially appearing like a maxed line of credit on a credit report)- in fact, if you have multiple lines of credit that you pay on TIME it will improve your score & improve your ability to acquire more credit. Many investors own multiple properties that are being simultaneously financed- this is a suggested goal to shoot for! Great question, as the guidelines for generating a credit score are kept a mystery to most people (by design?) so many people must wonder if having multiple mortgages has a negative effect! Glad to see, in my experience, it does not negatively impact the credit unless not paid as agreed.

Michelle, loan officer’s response:

It will all depend on your purpose for refinancing as to whether or not it will benefit you. You would want to do a comparison chart. Rates have been consistently low over the past year remaining at 40 year historic lows. If you have a higher rate in the 6’s or high 5’s it may make sense to refinance now even if you incur some costs because a majority of these fees can be used as a write off and it may save you a substantial amount of money over the next 10-15 years. Another factor to consider is how long you plan to remain the home? As for larger mortgages vs smaller mortgages, that does not affect your credit negatively as long as you remain current. Mortgage debt has an entirely different impact on your credit scoring than revolving debt such as credit cards, auto loans, etc. I would be happy to answer your questions in more detail at any time. You can email me at MichelleBennett914@gmail.com

Photo courtesy of www.besthousedesign.blogspot.com

April, from Arizona! Congratulations!!! You were chosen randomly by random.com! April, please email me your info at once so I can find out which flavor you’d like & get your cake in the mail! Thanks so much to everyone who participated!! If you didn’t win this time, despair not! We’ll be having giveaways often (a very “RELAXING” one coming up SOON) so check back & tell your friends! Also, please keep your real estate questions coming as I plan to answer them in upcoming blog posts, (just as soon as I can blog more, in between finding you all deals)! Love, prosperity & SUCCESS!,

Candy