Do you feel like you have joined Alice and followed the White Rabbit down the rabbit hole to Wonderland…..AKA Mortgage Lending Land?
I am sure that everyone recognizes the need to stay plugged into the on-going guideline changes, but it almost seems manic in this Wonderland/Lending Land at times.
Some of the latest changes include:
FHA: An increase to the FHA Upfront Mortgage Insurance Premium from 1.00% to 1.75%. An increase to the Monthly Mortgage Insurance Premium to 1.25% for loans with 5% or less down.
Credit requirements for FHA have been updated to reflect the following:
Only collection or disputed accounts that have a total outstanding combined balance of less than $1,000 and aged two years from date of last activity will no longer require underwriter review. Collections or disputed accounts not meeting those guidelines must be paid off, or resolved prior to closing with documentation, and paying the balance down to $1000 is not acceptable. Are you feeling like the Chesire Cat is grinning at you, just like in Alice in Wonderland? It is important to recognize that the lending industry is being redefined. As more loans go into default, the original loan documents are analyzed for possible red flags. Over time, polices and guidelines are developed to prevent future problems.
Next up is the self-employed borrower. If a borrower is selfemployed, a P&L and Balance Sheet will now be required if more than a calendar quarter has elapsed since date of most recent calendar or fiscal year-end tax return was filed. Additionally if income used to qualify exceeds the two year average from tax returns, an audited P&L or signed quarterly tax returns obtained from the IRS are required. Verified income that is stable is critical to the loan approval.
Investors require Tax Transcripts direct from the IRS on FHA and all other loan types. This poses a real problem for the selfemployed borrower who may not have filed their tax returns since that is their verification of income.
Consider the fact that due to our current market, borrowers are often in the home buying process for many months. It is very challenging to maintain a pre-qualification with borrowers when the guidelines change and life continues to happen which may affect their credit, income, or assets. It is critical to make sure that each time a new guideline is rolled out, a review of the borrowers file occurs to make sure they are maintaining their prequalification.
In regards to disputed accounts, the dispute must be resolved and the credit report rerun to reflect the new information. Overall, Investors continue to raise the bar including guidelines and fees on investment properties. In recent months, Fannie Mae & Freddie Mac have both raised the costs for Investor loans which equates to additional points, and just this month Investors have started to add another requirement of a second full appraisal for all investment occupancy transactions with a sales price or appraised value less than $100,000.
Once again the guidelines are changing concerning Non-Arm’s length transactions. The new announcement states that a Non-arm’s length transaction is not allowed on second homes or investment property transactions. The good news is that a Nonarm’s length transaction for the purchase of a primary residence is allowed. However, a non-arm’s length, primary residence, which includes a flip transaction, is not allowed. Perhaps the Queen of Hearts in the Alice in Wonderland adventure could relate to our ever changing lending environment as she declared “off with their heads” during their games. But we can find encouragement with Alice. This young lady continually adapted to her situation. She observed and studied her situation. At times she was large and small in size as she learned to move thru Wonderland. It obviously was not easy or pleasant at times, and she did engage in discussions to try to understand her situation. Hopefully, the same holds true for all of us involved in the real estate industry. We need to continue to read the announcements, take classes, and ask questions.
We could be like Alice, since she did find her way out of the rabbit hole and Wonderland.