Category Archives: Mortgage Information

Getting a mortgage for the self-employed just got easier

If you’re one of the millions of Americans who are self-employed or earn money on the side through freelance, contract or “gig” work, you may know the drill firsthand: Applying for a mortgage can be an intrusive ordeal.

Compared with people who have W-2 forms or pay stubs to verify their income, you encounter a much more time-consuming process. Lenders want to see your full tax returns for a couple of years — the whole box of stuff, not just an electronic transcript from the IRS. They need hard documentation of any income you’re claiming to qualify for the loan. And even if you can document your sideline pay, it might not be steady enough or ongoing long enough to be eligible under mortgage-industry rules.

You’re likely to get hit with a lot of questions: How come you reported less on your tax returns than what you’re claiming as your income on your loan application? You may also get charged more in fees, take longer to get approved, and end up with a slightly higher interest rate on your loan.

 

Lenders do this because self-employed earnings for mortgage eligibility purposes can be squishy, and there’s a lot riding on accuracy. If they approve a loan that turns out to be based on inflated or ineligible self-employment income, they can be hit with severe penalties. If they sold your mortgage to an investor, which is commonplace, they could be forced to buy it back.

 

But major improvements are underway: As of earlier this month, the two largest sources of mortgage money in the U.S. — investors Freddie Mac and Fannie Mae — have deployed remarkable new technology that automates underwriting for applicants who are self-employed or have significant side income. Applications that previously would have taken days to analyze and verify may now take just minutes, thanks to the use of “optical character recognition” (OCR) technology that reads tax returns, identifies what qualifies as eligible income, and integrates it into both companies’ electronic underwriting systems. Dallas-based tech company LoanBeam supplies the OCR solution in both cases. Freddie Mac notified its thousands of lenders of the change March 6; Fannie Mae introduced its program in December.

 

Instead of an underwriter having to plow through wads of tax documents, lenders can now upload the paperwork directly to LoanBeam, where it will be scanned and analyzed within minutes, saving time and money for borrowers and lenders alike. Andy Higginbotham, a Freddie Mac senior vice president, told me the new system “takes three to five days out of the process,” can cut hundreds of dollars in costs, and slashes risk for the lender. If Freddie’s automated underwriting system approves the application with the LoanBeam-verified income, Freddie will not hold the lender responsible for inaccuracies that pop up later. Fannie Mae’s system does the same.

 

The move to automation could have wide impacts. In 2016, the Bureau of Labor Statistics reported that there were approximately 15 million self-employed individuals in 2015, one of every 10 people in the workforce. A tax-preparation industry estimate indicated that more than one-third of workers earned income from “gig-economy” sources in 2015 — such as driving for Lyft or renting out a house via Airbnb — and that the total will exceed 40 percent by 2020.

read more at: https://www.courant.com/consumer/hc-hre-harney-column-20190317-20190315-pv6znyqvpngozpnrqsqy6n3nri-story.html

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FHA toughening its underwriting rules

First-time and move-up homebuyers with heavy debt loads, low credit scores and small down payments face a daunting new mortgage hurdle: The Federal Housing Administration is toughening its underwriting standards. Large numbers of applications could be turned down in the coming months as a result.

Industry estimates vary about the impact of the agency’s abrupt changes, but mortgage company executives told me last week that they are bracing for reductions in their FHA business by anywhere from 10 percent to 30 percent.

Here’s what’s happening: For several years, FHA has insured loans to buyers who previously would have been considered too risky or marginal at best. Those applicants often carried crushing monthly personal debts — for credit cards, auto loans, student loans and other obligations — totaling more than half of their monthly incomes. Many also had histories of credit problems that lowered their credit scores. Combined with skimpy down payments of 3.5 percent and minimal bank reserves, these borrowers have a high statistical probability of defaulting on their loans.

To prevent big losses to FHA’s insurance fund, the agency recently informed lenders nationwide that from March 18 onward, it would be applying more stringent standards to applications from high-risk homebuyers. In its letter, FHA documented its reasons for the crackdown. According to FHA Commissioner Brian Montgomery, the agency has been seeing disturbing trends in the quality of loans lenders have been delivering to it:

  • Nearly one of every four approved home purchasers had a debt-to-income (DTI) ratio exceeding 50 percent, the worst since 2000. In January, 28 percent of buyers were in that category.
  • FICO credit scores are tanking. They’ve fallen to the lowest level since 2008 — an industry-low average of 670. In the first quarter of fiscal 2019, more than 28 percent of all new purchase loans had FICOs below 640. In the same quarter, more than 13 percent of new loans had scores under 620 — 19 percent higher than the same period in the previous fiscal year. (FICO scores range from 300 to 850; low scores predict higher risks of nonpayment. Average scores for purchasers at giant mortgage investors Fannie Mae and Freddie Mac average around 750.)
  • Borrowers are siphoning equity from their homes at an alarming rate. In fiscal 2018, FHA saw a 60 percent increase in “cash-out” refinancing as a percentage of all refinancings. Cash-outs allow borrowers to convert equity into spendable money.
  • Growing numbers of loans have multiple indications of serious future risk of nonpayment — combinations of low credit scores of 640 or less and DTI ratios that exceed 50 percent.

Read more at: https://www.chicagotribune.com/classified/realestate/ct-re-0331-kenneth-harney-20190331-story.html

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24 Million Mortgage and Bank Loan Docs leaked online

A trove of more than 24 million financial and banking documents, representing tens of thousands of loans and mortgages from some of the biggest banks in the U.S., has been found online after a server security lapse.

 

The server, running an Elasticsearch database, had more than a decade’s worth of data, containing loan and mortgage agreements, repayment schedules and other highly sensitive financial and tax documents that reveal an intimate insight into a person’s financial life.

 

But it wasn’t protected with a password, allowing anyone to access and read the massive cache of documents.

 

It’s believed that the database was only exposed for two weeks — but long enough for independent security researcher Bob Diachenko to find the data. At first glance, it wasn’t immediately known who owned the data. After we inquired with several banks whose customers information was found on the server, the database was shut down on January 15.

read more at: https://www.huffingtonpost.com/entry/bank-loan-mortgage-documents-leaked_us_5c4979ade4b0287e5b881162

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