The way a self-employed person counts his (or her) income is not the same as the way a lender calculates it. It’s not unusual for a self-employed individual to say he makes a six-figure income and then find out that only $60,000 will count. This is a blow that knocks him out of qualifying for the house he desires. But I have good news! There is now another option. I’ll explain.
Smart CPAs are hired to find all legal tax deductions. This is great when facing the IRS, but when all those deductions reduce the adjusted gross income severely, it can derail your goal to buy a home. Usually, the self-employed person finds this to be unfair and nonsensical. I can’t say I blame them, but the government sponsored agencies, Fannie Mae and Freddie Mac, have their regulations set in stone.
Another Source of Money Comes to the Rescue
Now there are lenders who will accept cash flow as an alternate way of looking at self-employed income. If the money comes into your bank account, then it counts. Expenditures are not subtracted.
Simply add up all deposits for 24 months, then take the average. That is your income on the “bank statement income program.”
Where to Get This Loan
The way to get this program for self-employed buyers is through a mortgage broker or full service mortgage lender. You will not find it at a bank or credit union. I work for a full service mortgage lender, Envoy Mortgage. I am licensed in California and Washington states. However, there are branches of Envoy in most other states, if you live elsewhere.
You want to ask the loan officer, “Do you have the bank statement program for self-employed people?”
If you have any questions, please let me know, and I’ll do my best to answer.
A credit inquiry is when a creditor (such as Visa, a bank, a landlord) pulls your credit report. Lately, people have been asking me how much this hurts their credit score and why. Here are the facts.
Too Many Hard Inquiries Hurt Your Score
A hard inquiry is when you apply for credit. If you applied for three credit cards during the holidays in order to save on your purchase, your credit score has been hit. Why? Because the credit bureaus do not know how you are going to use this new credit, whether or not you will max out your cards, or if you will pay on time. Also, when a person suddenly applies for a lot of new credit, it is a concern as to whether or not they will be able to afford the new, upcoming bills. Therefore, your score is temporarily lowered for six months until you have established your record with these new cards.
The Exception: When Hard Inquiries Will Not Hurt Your Score
On the contrary, you can apply for a mortgage or car loan with three companies in a short time span (less than 45 days) without it hurting your score. Why? Because the credit bureaus do not think you are getting ready to buy three new houses or cars. They assume you are shopping for the best deal.
That said, if you have six or more mortgage inquiries, it is going to raise a red flag to the underwriter approving your loan. Why? Because, as I explained in Mortgage Rip-Offs and Money Savers, shopping three lenders is sufficient. If you apply for a mortgage with many lenders, it looks like everyone is turning you down. That makes other lenders ask why no one wants to lend to you. You will then need to write a letter of explanation for your loan file.
Soft Inquiries Do Not Affect Your Credit Score
A soft credit inquiry is any of the following:
- You request your own credit report.
- An employer pulls your credit report.
- Your current credit card company looks at your credit report to check how you are managing your credit. (Yes, they have the legal right to do this.)
- Creditors troll your credit report to see if you are a good candidate to send a solicitation to. (To stop this annoying practice, go to http://www.optoutprescreen.com and get off creditors’ mailing lists.)
Don’t concern yourself with soft credit inquiries. They do not hurt your score in any way.
Unauthorized Hard Credit Inquiries
It is illegal for any creditor or lender to pull your credit report without your knowledge and consent. As a licensed, ethical loan officer, I ask every person who wants to get pre-approved for financing to give me their permission to order their credit report before I do so. And then, I make a record of this permission, whether it was by email, in writing on a form, or verbally, with the date. Other ethical loan officers do the same.
If a mortgage lender, bank, credit union, credit card company, or other loan company pulled a hard inquiry on your credit report without your permission, you have the legal right to have that inquiry removed from your report so that it does not harm your score.
First, contact the creditor to make sure you are correct about the hard inquiry. Then if they cannot provide you with your consent verification, ask them to send you and the credit bureaus a signed letter on company letterhead that requests the inquiry to be removed.
How Much Do Inquiries Lower Your Score?
The credit bureaus claim that an inquiry impacts your score only by about five points. However, in real life, it’s a different story.
One credit repair specialist tells me he has seen credit scores lowered by 15 points after several hard inquiries (such as multiple credit card inquiries). Another credit repair specialist said he saw a client’s credit score increase by 24 points after unauthorized hard inquiries were removed.
The higher your credit score, the more inquiries impact your score, because there are not other factors such as late payments and collections docking your score.
If you have a low credit score due to negative credit, then inquiries are the least of your worries. Work on establishing on-time payments and lowering your credit card balances to below 30% of the limit first, because those are your priorities.
For more information about how credit attorneys and certified credit repair specialists legally delete bad credit and restore your good name, please see here.
Thank you for reading my blog. I do my best to inform people of the facts about achieving “A” credit, because the American finance system is dependent on credit. Unless you are wealthy and will pay cash for everything — including a home — having a good credit score is essential.
I want to make everyone aware that mortgage interest rates have been and are continuing to rise rapidly. The rate you were quoted last week no longer applies. In fact, the rate you were quoted yesterday no longer applies. Your interest rate is not secure until it is locked.
To lock your rate, ask your loan officer to do so. For a matter this important, make the phone call. Do not rely on an email which can be overlooked or missed.
A rate lock is tied to a specific property address, loan amount, and other terms. There is a “Lock and Shop” program where you can lock in your rate before you have an address; however, that is riskier to the lender, so the interest rate is higher, which pretty much defeats the goal in most cases.
If you want a lower monthly mortgage payment, I strongly suggest you resist the temptation to wait until after the New Year to find a house. Get with your Realtor now and make an offer. Then the minute you have a mutually signed Purchase Agreement, send a copy to your loan officer so that you can lock in your interest rate.
If you know someone who is thinking of buying a home in the near future, please pass on this vital information, because procrastination will result in a higher payment.
Thank you for reading my blog posts and for helping pass on intelligence through social media.
I was working next to a newly hired loan officer. He was brand new in the business. A potential client asked him, “How much experience do you have?” Not wanting to say “two weeks,” he replied, “Five years.” Later, I asked him how he had five years experience when he was brand new and had not yet done his first loan.
“I was counting my experience playing baseball,” he said. Then he laughed.
The take-away is that it is important how you phrase your questions when interviewing loan officers. As a professional who has worked in both retail and wholesale lending since 1998, and as the author of Mortgage Rip-Offs and Money Savers, here are my suggestions.
Questions to Ask Your Loan Officer
- Tell me about your experience in the mortgage business. (Leave it open-ended so you can get the most insight into their experience.)
- How long does it take to close a purchase loan (substitute that with refinance, if applicable) with your company? (It takes longer to close a refinance, so be specific.)
- Everyone says they have “great service.” What do you do that is better than other lenders? (If they are truly great, they should give you a very specific answer, not simply dance around the subject with meaningless rhetoric.)
- What will you do if something unexpected happens in the middle of the process that threatens to sabotage my loan? (This is an excellent question to ask, because getting blindsided is no fun, and it happens more often than anyone likes to admit. It’s also a question I’ve never seen on anyone else’s list of questions, probably because the writer is not in the business himself/herself, or because they don’t want anyone asking that question.)
- Will you please give me an estimate worksheet that shows the terms of the loan? (This is an entire chapter in my mortgage books, so I won’t repeat the how and why here. Suffice it to say all the writers who tell you to call and ask what the interest rate is, are wrong. That approach will lead you to the biggest liar.)
If there is another important question you’d like to see on this list, please post it in a comment by clicking on comment at the top of this post.
I would like to say thank you to all of you who share my posts on Facebook and Twitter, because the more insight we can pass on, the better off we all are.
January 2014, financial experts and mortgage professionals said interest rates would rise by the end of the year. They remained fairly flat.
January 2015, same thing with rates remaining fairly flat.
January 2016, same thing and rates remained fairly flat until this month. At the beginning of November, interest rates started climbing, and they haven’t stopped. Day by day, we see small increases that add up over a week’s time.
One financial predictor has forecast 30-year fixed rates at 4.5% by the end of December.
The Federal Reserve Board has said they will likely raise rates in December. And remember, the market is anticipatory. So if higher rates are coming, lenders react now by raising rates so they aren’t caught short-handed.
If you have been thinking about refinancing — possibly into a shorter term or getting cash out — do not delay another day. Get your application in and get your interest rate locked.
If you want to be a home owner but are waiting until after the holidays, that’s a bad idea. You find less competition among home buyers and better rates now than in January. Get your home now, lock in your rate now, and set the closing for after the holidays. You can wait to move, but you can’t wait to get your financing in place if you want the best deal and lowest monthly payment.
If you are in California or Washington, I am happy to help you as I am licensed in those two states. If you live elsewhere, I suggest that you contact a full-service mortgage lender. Forget the Big Banks who have a terrible reputation on so many levels. A full-service mortgage lender has both their own money to lend and can shop wholesale lenders as needed.
My next post will be questions to ask your loan officer. I wanted to get this warning out about interest rates as soon as possible. No more procrastinating! Consider this is your last call before rates go even higher. Feel free to pass this on via social media.
The best time to get a map is before you walk into the forest. Likewise, the best time to get your mortgage map is before you go shopping for a house. If you work the system backwards, you are setting yourself up for possible disaster.
Here is a simple checklist for home buyers:
Notice that you take care of the financing first, then the house shopping second.
1. Choose a lender by asking for a cost estimate worksheet.
This is your very first step. Not, go house hunting. Not, get pre-approved. And certainly not, make an offer! Why? Because, you don’t want to shop for houses that you are not qualified to buy, so you take care of your financing first. And, you don’t want multiple lenders pulling your credit report, so you choose your lender first. The way to choose a lender is to review the estimate worksheet and speak with the loan officer to ascertain how they answer your questions. (What to ask a loan officer is a topic for my next blog post.)
2. Get pre-approved for financing.
Now that you have your trusted loan officer, you are ready to have your credit report checked, provide your financial documents, and receive your official pre-approval letter.
3. Choose a Realtor.
I recommend working with a certified Realtor rather than a real estate agent, because a certified Realtor has gone through extra training and is held to a higher standard of ethics and work practices.
4. Go house hunting and make your offer.
Your Realtor will guide you through the offer and negotiations. Your loan officer will guide you through the financing.
Thank you for stopping by my blog. Feel free to share this simple list via social media and with others who are thinking of buying a home. You would not believe the horror stories I’ve heard from people who have run headfirst into disaster by signing purchase contracts before they had their financing approved. I hope to save more people from that situation!
Since I don’t have a crystal ball to tell the future, let’s look at the principles and then see if we can come up with a conclusion.
Factors and Principles that Determine Interest Rates
- The election result was a surprise to investors. Investors don’t like surprises. This caused a rapid selling of bonds, which pushed interests higher by .125 percent overnight.
- Any rapid change in rates settles back down along with investors’ nerves. Remember what happened with Brexit?
- Uncertainty brings higher rates.
- Good economic news brings higher rates.
- Interest rates were trending upward anyway, irregardless of, and before, the election. Last year at this time, 30-year fixed rates were averaging 3.5%. Now they are closer to 4%.
- Sometimes the market just goes with the momentum — for awhile.
- Other factors, larger on the global economic stage, influence interest rates more than the U.S. election. Specifically, the European Central Bank Announcement coming next month (and the anticipation of it) is having a greater impact on interest rates than President-elect Donald Trump.
- The President does not set interest rates. The global economic condition sets interest rates.
- The market is anticipatory. Investors try to guess what will happen tomorrow and then react accordingly today.
Back to our headline question: Where are interest rates headed? I’m sorry I can’t tell you exactly what will happen, but your crystal ball is as good as mine. If you are nervous about rates going up, lock in your rate and be secure.
Thank you for stopping by my blog. Feel free to subscribe and to pass this info on via social media.
If I can help you with a refinance or home loan, I am licensed in California and Washington, NMLS 1294134. Send me at email telling me what you need.
Have you (or perhaps someone you know who got behind on bills) been charged an extra processing fee by the collection company? Have you been bullied by a debt collector? Has the collector blabbed your personal information to others?
In a report out today, the Consumer Finance Protection Bureau (CFPB) reveals that some collectors are guilty of the following:
- Charging a processing fee on the debt.
- Lying to consumers that if they don’t pay immediately their credit would be further harmed.
- Revealing information about the person’s debts to friends and family while trying to track them down.
- Failing to properly investigate and validate a disputed account.
As a result of these crimes plus illegal practices by some auto loan servicers and student loan servicers, the CFPB has recovered $11,000,000 in damages. This money is to be distributed to 225,000 consumers who have been harmed.
If this is you (or possibly someone you know), contact the CFBP here. Please feel free to post this on social media to help get the word out. You never know who among your acquaintances might be due a nice rebate check.
Good news for home buyers needing a zero down loan! The USDA has just announced that
funds are now available for 100 percent financing — and at better pricing than last year! Here are the details.
No down payment. 30-year fixed rate, no prepayment penalty. Interest rates are competitive with conventional loans.
The USDA Fee (now 1%, previously 2.75%) is financed into the loan. Other eligible closing costs may also be rolled into the loan, or you may use gift money, grant money, or a seller contribution to pay for the closing costs. This means you need very little out-of-pocket cash to become a home owner.
The monthly mortgage insurance (MI) fee has been reduced to only .35% (previously .5%).
Credit and Debt Ratio
Perfect credit not required. If you had a late payment, collection/charge-off, bankruptcy, or even a foreclosure in the past, you might still qualify. In general, underwriters want to see at least 12 months of good credit to show you have recovered from the past and are on track.
Debt-to-income ratio should not be over 41% unless your credit score is over 660. In that case, there is more flexibility. (DTI is calculated with your gross income before any deductions, using your proposed housing payment plus minimum required payments on your credit report. You do not count living expenses such as transportation, cell phone, food, etc.)
You can earn up to 115% of the area median income. Number of people in the family is taken into account.
97% of the U.S. is USDA-eligible. Homes located in large metropolitan areas are ineligible. Many suburbs, charming towns, as well as rural areas qualify.
To check both income and property eligibility, click here. Or, speak with your state licensed mortgage loan officer. If you are in WA or CA, I am available to help you.