Mortgage / Home Loans FAQ

Tips on Using Tips

noreply@blogger.com (Franklin Advantage) — Thu, 22 Jan 2015 02:16:00 +0000

Moreno Valley, CA asks:
Most of my income comes from tips. Will they count my tips when I apply for a home loan?

Franklin Advantage:
Fannie Mae, Freddie Mac, FHA and VA will all count tip income as long as you have reported it on your tax returns of the past two years. Like any other income it will be averaged over the past two years or twelve months if you made less in the most recent year.

Unlike other income, you may not have to document your year to date tip income. Many people who receive tips paychecks do not show their year to date tips. This is acceptable as long as you have claimed the tips on your tax returns for the past two years.

The obvious problem is that many people don’t claim their tip income. And when they go to apply for a mortgage, there is no way to document this income. They end up forfeiting a large part of their income as far as loan qualification.

Do you have questions on qualifying for a home loan? Call Franklin Advantage at (800) 314-5626, one of our seasoned, professional Loan officers will be happy to help you through the home buying process.

A Holiday Job Can Help You Qualify

noreply@blogger.com (Franklin Advantage) — Wed, 03 Dec 2014 01:37:00 +0000

Eagle Rock asks:
Every year I work for Macy's during the Christmas season. Will the lender count my income from this job?

Franklin Advantage:
Seasonal employment is an acceptable source of income. You need to show a two-year history of consistent time on and off the job.

The good example is a Forest Technician. A Forest Technician will only work a few months a year, they are hired annually through the USDA and when not working, many collect unemployment. Fannie Mae, Freddie Mac, FHA and VA will all use this income and even, use the unemployment income if it has been received over the past two years.

Correctly calculation your income and determining the bast way to get you most home with the smallest payment requires a Loan Officer with experience. Contact or call Franklin Advantage at (800) 314-5626 and let one of our seasoned, professional Loan Officers review your situation and help you get pre-approved for your next home purchase

King FHA

noreply@blogger.com (Franklin Advantage) — Wed, 12 Nov 2014 23:24:00 +0000

Paramount, CA asks:

I've called several lenders and everyone of them tells me I should get a FHA loan but nobody tells me why. Why should i get a FHA loan?

Franklin Advantage:

An FHA loan will let you buy a home with only a 3.5% down payment. That’s just $14,000 when buying a $400,000 home. The down payment can be borrowed from a retirement account, a gift or from savings.

The 3.5% down FHA loans underwriting allows for FICO scores at 580 or greater. With 10% down FHA will accept credit scores as low as 550. Collections on a payment plan, foreclosures and bankruptcies only three years old and “no” credit are acceptable through FHA.

Deferred student loans and loans against your retirement account are not counted in your ratios. FHA will also accept co-signers to help a buyer qualify.

FHA offers 30 year fixed rate loans with interest rates that are usually lower than those on conventional home loans.

If you haven’t been pre-approved, call Franklin Advantage at (800) 314-5626. Our seasoned, professional Loan Officers are available to answer your questions and guide you through the home buying process.

Buying a Haunted House

noreply@blogger.com (Franklin Advantage) — Mon, 27 Oct 2014 15:17:00 +0000

Hollywood, CA asks:

My partner and I were looking at a home to purchase when the real estate agent told us that the previous owner had died in the house. My partner says that this will affect the value and he would never buy a house someone died in. How does a death affect the home's value?

Franklin Advantage:

In California the seller of a home must disclose if someone has died in a home in the past three years. It is considered a material fact that can affect the value of the home. Beyond three years, it is not required that it be disclosed.

Does a death in the house truly affect the value? That depends on multiple factors.

A home that was occupied by a longtime resident that passed peacefully in the home has very little effect. While a home that was the scene of a grisly homicide may have a difficult time finding a buyer.

A death may not be the only factor affecting the value. In a Sacramento area home there was a brutal beating of an 82 year old woman and the ransacking of her home. She lived but did not want to move back into her home and put it up for sale. After months, the home sold for substantially under market. The previous crime and the location of the home (it backed up to railroad tracks that were frequented by the area homeless) greatly deterred buyers.

When looking for a home, the least likely question on most people's mind is whether the seller died in the house. It's much more likely that they are concerned about the sales price and monthly mortgage payment.

With interest rates below 4%; a new mortgage payment won't be scary. Call Franklin Advantage at (800) 314-5626. One of our seasoned Loan Officers will be happy to help you.

New Purchse Contract Closes the Appraisal Loophole

noreply@blogger.com (Franklin Advantage) — Sun, 21 Sep 2014 17:36:00 +0000

Bellflower, CA asks:

We are in escrow to buy a home now. Our real estate agent says that we should sign off on the appraisal even though the appraisal is not in yet. She says that we are still protected because the appraisal is required for the loan. I don't quite understand and we are feeling a lot of pressure to sign. Please help.

Franklin Advantage:

When you make an offer to buy a home in California, your real estate agent will write the offer on a form designed by the California Association of Realtors (CAR) over the past 60 years. The RPA (Residential Purchase Agreement) is an 8 page contract that protects you, the buyer and the seller.

Currently, the RPA allows you to release the appraisal contingency and still keep the appraised value as a condition of the loan approval contingency. A "contingency" is a clause that allows you out if the contract without any harm to you.

In November the RPA is the decoupling of the appraisal and loan contingency. The new update will allow you to release the appraisal contingency and acknowledge that the appraisal will not be a reason that will hinder the release of the loan contingency.

Another change is being updated. There will be several changes including the lengthening of the amount of time allowed to get your loan approved. Currently, the RPA default is 17 days. The new default will be 21 days.

When you are making an offer on a home, your agent should make sure you are fully aware of what you are signing... There is more to the RPA than the offer price. Our seasoned, professional Loan Officers have years of real estate experience. Call Franklin Advantage at (800) 314-5626.

Fannie Mae is Changing the Rules on Short Sales

noreply@blogger.com (Franklin Advantage) — Fri, 01 Aug 2014 17:07:00 +0000

Stanton, CA asks:

My husband and I had a short sale three years ago. I've been told that the wait time can be as little as two years. I've also heard this is about to change. Can you please tell us what the story Is?

Franklin Advantage:

Fannie Mae is changing the way they underwrite borrowers with a previous short sale. As of August 16th a borrower with a short sale that was delinquent at the time of the sale will have to wait four years before they will be able to get a new Fannie Mae loan.

Currently Fannie Mae only require two years as long as the borrower is borrowing no more tan 80% of the homes sales price regardless of the loans status at the time of the short sale.

FHA still only requires a three year wait and VA loans only require a two year wait.

A short sale is when a home owner sells their home for less than is owed. The sale requires the lender to accept less than is owed.

Please call us at (800) 314-5626 and one of our seasoned, professional Loan Officers will help you explore your options.

Having a Baby and Buying a House

noreply@blogger.com (Franklin Advantage) — Thu, 12 Jun 2014 18:25:00 +0000

La Habra, CA asks:

My husband and I have been pre-approved for a home loan by our credit union. I am expecting my first child in November. Our loan officer told us that if we don't buy our home before I leave on maternity leave, we sill not get our loan. Is this right?

Franklin Advantage:

Fannie Mae and Freddie Mac underwriting guidelines allow the underwriter discretion when considering a borrower's income while she is on maternity leave.

Most investors choose not count the income of a pregnant borrower. The reasoning was that the disability income could not be documented to continue for at least three more years and there is no guarantee that the borrower will return to work after he child is born.

FHA guidelines allow for a buyer to get a home loan when they are on pregnancy leave. Underwriters are allowed to count the borrowers disability income in lieu of their salary as long as the disability is documented and the borrower provides a letter explaining their desire to return to work once the disability runs its course.

In the past, many investors have not followed this FHA guideline and instead ignored the income of a pregnant borrower. But over the past year, both Bank of America and Greenlight have been sued by HUD for not following the FHA guideline. The practice of denying a home loan because a woman is pregnant is discriminatory. Both Bank of America and Greenlight have paid hefty fines and the industry standard has now changed.

Many hurdles of the past few years have been removed and more people are finding that they can buy a home. Call Franklin Advantage at (800) 314-5626.

How Much are Closing Costs?

noreply@blogger.com (Franklin Advantage) — Sat, 17 May 2014 19:51:00 +0000

San Dimas, CA asks:

When buying a house I know how to figure out the down payment. But how much are the closing costs?

Franklin Advantage:

The closing costs on a home loan range from zero to three percent of the sales price.

The zero cost options are when the buyer accepts higher rate with a lender credit to cover other transfer fees (title, escrow, recording, appraisal, etc.) The higher cost option includes loan discount points that are used to buy a lower interest rate.

You can ask the seller to pay up to three percent of the sales price when you are using conventional (Fannie Mae and Freddie Mac) financing. FHA or VA will allow the seller to contribute up to 6 percent of the sales price.

So what would you do with the extra 3% on an FHA or VA loan?

FHA and VA both have a one time, up front mortgage insurance fee. Both allow the buy to finance the fee with the loan so they don’t have to pay it as part of their closing fees but the seller can pay it.

VA loans will also allow the buyer to use the credit to pay off debts to help the veteran qualify for the loan. The VA buyer can pay off a car with the seller credit to keep the payment within his budget.

Do you have questions on qualifying for a home loan? Call Franklin Advantage at (800) 314-5626, one of our seasoned, professional Loan officers will be happy to help you through the home buying process.

Winter and Putin Came

noreply@blogger.com (Franklin Advantage) — Sat, 03 May 2014 18:00:00 +0000

Riverside, CA asks:
Wasn’t 2014 supposed to be the year that interest rates finally started heading up?

Franklin Advantage:
At the end of 2013 the economy was improving and interest rates on 30 year fixed rate loans had had moved up from the mid 3's to the mid 4’s in the last half of the year. The experts were sure rates would be at 5% by spring 2014.

The economy is improving. Today’s jobs numbers released by The Bureau of Labor Statistics were well ahead of expectations and unemployment is at 6.3% nationally: the lowest it has been since before the financial crisis. Yet interest rates on 30 year fixed rate loans are a quarter to a half percent lower than they were at the end of 2013.

What happened? Winter and Putin came.

The National Climatic Data Center said that the period from December 2013 through February 2014 was the 34th coldest for the US as a whole since modern records began in 1895. It was hard to tell out here in California where we experienced the warmest winter ion record but all the same, the cold stiffed economic activity. The slower economy put less demand on borrowed money which kept rates flat to lower.

Then there was Putin. Investors hate instability and the crisis in Ukraine has driven a lot of world money into safer assets like the US Dollar. As more money came into the US, more dollars became available to lend and that has pushed interest rates lower.

But how long will rates stay this low? Who knows? What is important is that interest rates are good now. If you have been toying with the idea of buying a home or refinancing, now is the time to act.

Call Franklin Advantage at (800) 314-5626 and one of seasoned, profession Loan Officers will help you get started.

Using Your Retirement Account to Buy a Home

noreply@blogger.com (Franklin Advantage) — Fri, 18 Apr 2014 18:38:00 +0000

Long Beach, CA asks:
My husband and I both have retirement accounts through our employers. How can we use these to help us buy a home?

Franklin Advantage:
A 401K, 403B or almost any company retirement plan can be a valuable tool to help you buy a home.

Most company retirement plans will let you borrow against them. The loans are usually at a very low interest rate, they often cap you at half of the vested balance or $50,000 (whichever is lower) an the payments are drawn directly from your paycheck.

And since you are in essence borrowing your own money, Fannie Mae, Freddie Mac, FHA and VA do not count the debt against you.

There are several ways you can use this money to help you buy a home.

Down Payment

The most common use is for a retirement plan loan is a down payment. FHA loans only require 3.5% of the sales price as a down. The CalHFA program when used with the FHA only requires a half percent down payment. Even the smallest retirement accounts can help meet a 1/2% down CalHFA requirement.

Debt-to-Income Ratios

Your debt-to-income ratio, or DTI, is how underwriters determine if you can afford a house payment. The number is the percentage of monthly debt you have compared to your monthly income.

CalHFA, Fannie Mae and Freddie Mac limit your DTI to 45%. FHA will allow for DTIs to 56.9%.

If your DTI is too high, you can use your retirement plan loan to pay off auto, credit card or other debts to lower it. Remember, the payments on these loans are not counted in your DTI.

Credit

Outstanding collection accounts, delinquent credit and credit card accounts that are near or over their max limits can adversely affect your credit scores. With a focused effort, it can take months and even years to bring your credit scores up.

Why wait? Use funds from a retirement plan loan to clear old collections, bring payments current or pay down high credit card balances. You can improve your credit scores in 60 days.

Call Franklin Advantage at (800) 314-5626 and one of our seasoned, profession loan Officers can help you explore your options and help you buy your next or first home.

Buying a Home with Collections

noreply@blogger.com (Franklin Advantage) — Fri, 21 Mar 2014 22:49:00 +0000

San Juan Capistrano asks:
I have a collection on my credit. It was from a problem a long time ago and I really do not want to pay it. Does it affect my FICO score? Do I have to pay it off to get a home loan?

Franklin Advantage:
When you have a collection on your credit report it will affect your credit scores but it does not need to be paid to get a loan.

A collection is a debt that the initial creditor has given up on collecting through their standard methods. The debt is either mover to the company’s collection division or sold to a company whose primary business is collecting old unpaid debts.

Collections from medical bills and collections for less than a $1,000 generally do not need to be paid to get a FHA or a VA loan. These collections are considered by the underwriter in the buyer’s over-all credit profile. If there is no good compensating credit, they can lead to credit denial.

FHA and VA also do not necessarily need non-medical collections larger than $1,000 to be paid. If the buyer has negotiated an agreed upon payment plan with the collection company, the underwriter will consider the payment in the debt ratios but will not require the loan to be paid.

Both FHA and VA require the underwriter to consider the collections in their creditworthiness analysis. The underwriter may require a letter of explanation with supporting documentation for each outstanding collection account so that they can verify that the collections are not from the borrower’s disregard for financial obligations or the borrower’s inability to manage debt.

Don't let credit issues stand in the way of buying your home. Call Franklin Advantage at (800) 314-5363. Our seasoned, professional Loan Officers can help you get your home loan.

Buying A Duplex or Triplex as Your First Home

noreply@blogger.com (Franklin Advantage) — Sat, 01 Mar 2014 23:26:00 +0000

Dana Point, CA asks:
My husband and I are thinking of buying a duplex or triplex as our first home. Can we count the rents from the apartment we will not be living in to help us qualifying for a home loan? Is there any other things we need to consider when applying for a home loan?

Franklin Advantage:
Buying a Duplex as your first home or a next residence can be very practical. The rental income from the other unit can help you offset the payment and allow you to purchase more home than you would normally be qualified for. But not all programs approach these homes or the rents from them the same.

Fannie Mae, Freddie Mac, FHA and the VA have different ways of using the future rental income from the purchase of a duplex, triplex or four-plex as your residence.

All will credit you 75% of the rental income per the lower of the current documented rents or the appraisers estimate the market rents for the property.

But Freddie Mac and VA will not consider any rental income if you cannot show you have at least a two years’ experience in managing and maintaining rental property. Fannie Mae and FHA do not require any previous landlord experience.

You may also need to document that you will have financial reserves after the close of the purchase equal to as much as a year’s mortgage payments (including taxes and insurance).

When buying a duplex, FHA and VA do not require reserves after the close of the purchase. Fannie Mae and Freddie Mac both require six months reserves with Fannie requiring 12 months reserves if the borrower’s FICO score is below 680.

FHA requires three months reserves when purchasing a 3 to 4 unit home, VA requires six months reserves for the property. As with a duplex, Fannie and Freddie both require six months reserves with Fannie requiring 12 months reserves if the borrower’s FICO score is below 680.

VA, as in the purchase of a single family home requires no down payment for a duplex, triplex or four-plex but loan amount cannot exceed the maximum limits per the county. The current zero down payment loans available through VA are available to $687,500 in Los Angeles and Orange counties. The VA offer loans up to 1 million with a minimal down payment.

FHA requires a 3.5% down payment for a duplex, triplex or four-plex as in the purchase of a single family home. The maximum loan amount is set by FHA per county. Currently FHA offers loans to $800,775 on duplexes, $967,950 on triplexes and $1,202,925 on four-plexes in Los Angeles and Orange counties. Unlike purchasing a single family residence, FHA limits the maximum loan to 75% of the sales price when there is a co-signer who does not plan to live in the property on 3 and 4 unit properties.

For home loans on duplexes that do not exceed $417,000, Fannie Mae fixed rate loans require a 15% down payment. Fannie adjustable rate loans (including 5, 7 and 10 year fixed rate hybrids) require a 25% down payment. For duplex loans that do exceed $417,000, Fannie requires a 25% down payment for fixed rate loans and a 35% down payment for adjustable rate loans.

For home loan on triplexes and four-plexes, Fannie fixed rate loans require a 25% down payment and adjustable rate loans require a 35% down payment.

The maximum loan amount available through Fannie Mae are limited by county and are currently the same as FHA.

For home loans that do not exceed $417,000, Freddie Mac requires a 5% down payment for duplexes and 20% down payments for a triplex or four-plex. For home loans greater than $417,000, Freddie requires a 25% down payment. The maximum loan amount is set per county. Currently Los Angeles and Orange county limits are the same as Fannie Mae and FHA.

Call Franklin Advantage at (800) 314-5626. We have seasoned, professional Loan Officers that can help you with your first home purchase whether it's a condo by the beach or a triplex in the inland empire.

The Case of the Mystery Deposits

noreply@blogger.com (Franklin Advantage) — Mon, 17 Feb 2014 17:00:00 +0000

Riverside, CA asks:
My husband and I are buying our first home. The lender has asked us to give them paperwork on every deposit into our bank accounts that shows up on our statements.

Is this normal? What is the underwriter looking for?

Franklin Advantage:
Fannie Mae, Freddie Mac, FHA and the VA require that deposits into your bank account that are not from your salary, retirement or other documented sources (pension, family support, IRS refunds) must be explained and sourced.

If the bank statements the underwriter reviews for your home loan reflects deposits from a gift, the sale of a car or even a successful yard sale; the underwriter will require a letter explaining the source of the money and documentation supporting the explanation.

The reason Fannie Mae, Freddie Mac, FHA and the VA require the underwriters to verify these deposits is to make sure you didn't open another a loan that is not on your application or credit report. An undisclosed loan will have payments that will affect your ability to make your home loan payments.

Though explaining and documenting a deposit is inconvenient, most of time it is not a problem.

For example, when a car is sold; the borrower provides a copy of their insurance slip that shows they owned the car and its year, make and model, a Kelly Blue Book estimate of value, and a bill of sale.

When a deposit cannot be documented (ie: cash form your yard sale); as long as the deposit is not a large sum the underwriter will back out the money and not consider it as funds you have available for the purchase.

Call Franklin Advantage at (800) 314-5626 and one of our seasoned, professional Loan Officers will guide you through the home buying process.

PMI vs. Piggy Backs

noreply@blogger.com (Franklin Advantage) — Wed, 22 Jan 2014 19:10:00 +0000

Whittier, CA asks:
At a BBQ last week a loan guy said that home loans are available without PMI when you use a “Piggy Back”. What is a Piggy Back?

Franklin Advantage:
A Piggy Back loan is a second loan you get concurrently with your first loan. A Piggy Back loan of 10% of the sales price with a first loan at 80% of the sales price allows you to buy a home with only a 10% down payment and avoid PMI (Private Mortgage Insurance).

The Piggy Back second requires better than average credit and is at a slightly higher interest rate but the avoidance of PMI makes it well worth it; especially because PMI is no longer tax deductible.

Since 2007 PMI has been tax deductible. Like the interest you pay on your mortgage, the PMI you paid would lower you tax obligation. But Congress failed to extend the PMI deduction that expired at the end of 2013.

The mortgage payments on financing with a Piggy Back is usually very close or lower to what the payment would be with PMI but there will be additional costs associated with obtaining the Piggy Back loan.

If you have any questions on qualifying for a home loan; call Franklin Advantage at (800) 314-5626. Our seasoned, professional Loan Officers re available to help you explore you home loan options and guide you through the home buying process.

Using Bonus and Commission Income to Qualify for a Mortgage

noreply@blogger.com (Franklin Advantage) — Sun, 22 Dec 2013 00:44:00 +0000

Los Alamitos, CA asks:
I am paid minimum wage plus commissions and bonuses. If the underwriter only looks at my minimum wage salary; I can't buy a dog igloo at the Home Depot!. When will an underwriter consider commission or bonuses as income? And more importantly, when will they not consider them as income?

Franklin Advantage:
The HUD 4155.1, Mortgage Credit Analysis has 40 pages dedicated to calculating income: Fannie Mae’s Sellers Guide has 56 pages. The both are very specific in the use of commission and bonus income when used for qualifying.

Generally, commissions and bonus income can be counted if the borrower can document they have received it for two years and there is a likelihood that it will continue. There are few things the underwriter will consider when looking at this type of income.

As a rule, the underwriter will average the last two years and the year to date bonus or commission income. But there are exceptions.

Has commission or bonus income decreased from the year before? Or does the year to date indicate lower commissions? If so, the underwriter may not consider it likely to continue. Where the underwriter will usually average the commission or bonus income over the past two years, they may instead only consider most recent year or not count it at all.

What if you switched from one commission job to another commission job? As long as the most recent two years of continuous employment reflect commissions or bonus income, it may be considered subject to the same limits listed above. It will not be considered if the jobs are not in the same field or if the jobs are not considered similar.

What if you changed employers from a salary or hourly position to an employer that pays a lower salary plus commissions or bonuses? Unfortunately, unless there is a two year history of receiving the commissions or bonuses; only the current lower salary can be used.

There are methods that can be used to reflect the highest income possible when calculating commission or bonus income for mortgage underwriting. A seasoned Loan Officer knows that a two year average is the guideline: not a two year and several month average. By documenting only most recent two years and eliminating lower commission months over two years ago, the underwriter can increase the amount available to qualify.

Most people paid on commission have un-reimbursed employee expenses listed on their tax returns. these expenses are also averaged over the past two years. Un-reimbursed employee expenses appear on the bottom of the schedule A of your tax returns and sometimes have a form 2106 attached to your taxes as well. Un-reimbursed employee expenses are deducted from your qualifying income.

There are many aspects to calculating commission or bonus income that an underwriter and a seasoned Loan Officer review when determining commission and bonus income . They are too numerous to go through here but feel free contact to Franklin Advantage or call us at (800) 314-5363. Our seasoned, professional Loan Officers can help you explore your home loan options.

Can Unreported Income Help Us Qualify for a Home Loan?

noreply@blogger.com (Franklin Advantage) — Thu, 14 Nov 2013 19:48:00 +0000

Seal Beach, CA asks:

My wife is a hair stylist. She often gets paid in cash. Can we use “under-the-table” income, income that is not reported on our tax returns be used to help us qualify for a home loan?

Franklin Advantage:

The simple answer is “no” - mostly.

FHA, VA, Fannie Mae and Freddie Mac make no exceptions. If you have taxable income that is not reported on your tax returns; they won’t use it.

But there is income that is not taxable that they will use. Family support and veteran’s disability are two types of income that are not taxable and will not appear on your tax returns that can be used in qualifying.

There are new programs that are available to more affluent home buyers. These new programs will allow buyers to use their most recent bank statements to document their income. They’re available for loans greater than $625,500 and require a minimum down payment of 25% of the sales price. These new programs also require that the buyer be self-employed, have exceptional credit and 6 to 18 months cash reserves after the close.

Will these types of programs become available to the average Joe? Probably, but not for a few years.

Contact or call Franklin Advantage at (800) 314-5626 and let one of our seasoned, professional Loan Officers help you buy a home.

Underwriting Disability and Other Non-Taxable Income for a Home Loan

noreply@blogger.com (Franklin Advantage) — Thu, 03 Oct 2013 23:47:00 +0000

Ontario, CA asks:
I was told to my debt to income ratio is too high. I don’t understand why this is. We pay more for rent every month than what the payment would be for this house! My husband is disabled and I have been with the post office for over twenty years. Is there something the bank is missing?

Franklin Advantage:
Maybe. When the bank calculated your debt-to-income ratios, did they consider that your husband’s income is non-taxable?

Your “debt-to-income” ratio is how your total monthly debts (including your housing) compare to your monthly income. If your debt-to-income ratio is too high; you will not get approved. This makes the calculating of your income critical in the underwriting process.

When you have income that is not taxed, mortgage underwriters will give you greater credit for that income. Fannie Mae, Freddie Mac and FHA will take your non-taxable income and credit you 125% for mortgage qualifying purposes. VA will credit the veteran 115% for qualifying purposes.

For example; if you receive disability of $1,000 a month; a FHA, Fannie Mae and Freddie Mac underwriter will “gross up” the income to $1,250. A VA underwriter will gross up that same $1,000 to $1,150.

Examples of non-taxable income include:
• Child support
• Housing
• Sustenance
• Disability
• Veteran Benefits
• And Social Security (most of the time)

To use Child Support as income the borrower must document that he or she will be receiving it for three years after the close of the home loan. Usually a birth certificate and a court order or divorce decree are required.

Housing allowances are received by men (and women) of the cloth along with many members of the military. Housing is reflected on the military paycheck stub (LES) as “BAH”.

Sustenance is often received by member of the military. It is reflected on the LES as “BAS”.

Disability from Social Security is not taxable.

Veteran Benefits including retirement and disability are not taxable.

Social Security may be non-taxable. You must refer to the borrowers Federal Tax Returns to see if they have been subject to taxation. If the borrower(s) combined income is under $25,000 for singles ($32,000 for couples filing jointly), then your benefits aren’t taxable.

Call Franklin Advantage at (800) 314-5626 and a professional, seasoned Loan Officer can help you review your qualifying options.

How Fannie Mae & FHA Underwrite Corporation Income

noreply@blogger.com (Franklin Advantage) — Wed, 18 Sep 2013 05:34:00 +0000

Newport Beach, CA Asks:
I have ownership in a corporation/business. I am paid a salary. Will I still be considered self-employed? How will a mortgage underwriter calculate my income?

Franklin Advantage:
Fannie Mae, Freddie Mac, FHA and VA consider any borrower that has a 25 percent or greater ownership in a corporation to be self-employed.

Because your question does not specify what type of corporation, I will answer for both a C corporation and an S corporation. But first, let me explain what a corporation is and the difference between a C corp and an S corp.

What is a Corporation?

A corporation is a state-chartered business that is owned by shareholders. An owner/shareholder is not personally liable for the debts of the corporation. Although legal control of the corporation rests with its shareholders, often they are not responsible for the day-to-day operations of the business. The operation of the corporation is delegated by the shareholders to a board of directors and officers of the corporation.

C Corporation vs. S Corporation

There are two types of "for profit" corporations: a C corporation and an S corporation.

A C corporation is taxed as a separate entity. The corporation must file an IRS Form 1120 each year to report its income and to claim its deductions. Profits earned by a corporation are taxed based on corporate tax rates.

The shareholders of a C corporation are primarily paid through dividends. Dividends are claimed as income by the shareholders and are taxed as personal income again. To avoid being "double taxed", many smaller businesses are incorporated as an S corporation.

An S corporation differs from a regular corporation in that it is not a separate taxable entity under the Internal Revenue Code. All profits must be disbursed to the shareholders every year. The shareholders are taxed at their individual tax rate for their proportionate share of the ownership.

Since all profits are disbursed annually to its shareholders, the S corporation retains no taxable profits. This also means that the corporation cannot retain profits to use for a future investment or to keep for a rainy day.

If a borrower is paid a salary from a corporation in which they have a 25 percent or greater ownership interest, the W-2 income from a corporation will be averaged over the previous two years. If an analysis of the corporation reveals that the income is not sustainable, the income will be negated.

Qualifying with an C Corporation

Borrowers with 25 percent or greater ownership interest in a C corporation will be required to provide documentation to evidence the viability of the corporation. This includes the corporate tax returns (IRS Form 1120), and a year-to-date profit and loss and balance sheet.

Freddie Mac, FHA and VA will limit income from the corporation to the borrower's percentage of ownership. The borrower’s percentage of ownership can usually be determined from the “compensation of officers” section of the corporate tax return, IRS Form 1120. If this information is not provided, the lender must obtain other evidence of the borrower’s ownership before this income can be considered.

Fannie Mae will only use the income from the corporation if the borrower owns 100 percent of the corporation.

Many C corporations operate on a fiscal year that is different from the calendar year; the underwriter will make time adjustments to relate the corporate income to the individual tax return.

Fannie Mae, Freddie Mac, FHA and VA will allow the income or loss from the underwriter’s analysis of the corporation tax returns to qualify the borrower. Fannie Mae will only allow the income if the borrower owns 100 percent of the corporation but will count losses if borrower has a 25 percent or greater interest in the corporation.

The underwriter’s analysis of the corporation’s income includes the adding back of non-cash losses. These include "Depreciation", "Depletion" and "Amortization/Casualty Loss". All can be added back into the cash flow of the corporation.

The underwriter will subtract "Mortgage or Notes Payable in Less than 1 Year". These obligations may significantly affect the financial operation of the business. If the borrower can provide documentation to evidence that these liabilities regularly rollover; Fannie Mae does not consider this deduction necessary: FHA, VA and Freddie Mac still do.

Once the underwriter adjusts the corporation income for all expenses; the underwriter will re-evaluate the corporation's overall financial stability. If the corporation shows decreasing income or continuing losses, this may negate all or part of the borrower’s dividend or salary income from the corporation.

Qualifying with an S Corporation

Borrowers with 25 percent or greater ownership in an S corporation will be required to provide the most recent two years corporate tax returns - IRS Form 1120S and IRS Schedule K-1. The Schedule K-1 is used to report each shareholder's percentage of ownership and their pro-rated share of profit. A year-to-date profit and loss and balance sheet will also be required if the loan is funding beyond April 30th.

Fannie Mae, Freddie Mac, FHA and VA underwriting guidelines for an S corporation require that the mortgage underwriter initially calculate the S Corporation income by reviewing the applicants "Schedule K-1 (Form 1120S)". The Schedule K-1 is attached to the borrowers Federal Tax Returns (1040's) and the income (or loss) is reflected on the borrower's Schedule E.

Line 1 of the Schedule K-1 shows "Ordinary Income or Loss". If there is a loss, the underwriter will subtract the loss. On the other hand, the underwriter will add ordinary income from the Schedule K-1 to borrower’s income if the income is continuous and on-going over the past two years.

If Line F of the Schedule K-1 shows the shareholder has a 25 percent or more ownership interest in the corporation, Corporation Tax Returns (IRS Form 1120S) will be required.

The underwriter’s analysis of the corporation tax returns will enable the underwriter to calculate adjustments to the income or losses reported on Schedule K-1. Any income or losses from this analysis is limited to the borrower's percentage of ownership reflected on the K-1.

The underwriter will add back non-cash losses. These include "Depreciation", "Depletion" and "Amortization/Casualty Loss". All can be added back into the cash flow of the corporation.

The underwriter will subtract "Mortgage or Notes Payable in Less than 1 Year". These obligations may significantly affect the financial operations of the business. If you can provide documentation to evidence that these liabilities regularly rollover; Fannie Mae does not consider this deduction necessary.

The "Meals and Entertainment Exclusion" will be subtracted. The IRS only allows for a deduction of half this expense but since the whole expense is an actual cash expense; it is subtracted to add the non-allowed expense into the analysis.

Once the underwriter adjusts the corporation income for all expenses; the underwriter will re-evaluate the corporation's overall financial stability. Any additional income is limited to the borrower's percentage of ownership as reflected on the K-1.

If the corporation shows decreasing income or continuing losses, this may negate all or part of the income reflected on the Schedule K-1. Decreasing income or continuing losses will also negate any salary received by the borrower from the S corporation.

There are, of course, many other things that an underwriter will look at when calculating income from a C or an S corp, but they are too numerous to go through here. Call Franklin Advantage at (800) 314-5626 and a seasoned, professional Loan Officer can help you.

California Half Percent Down-Payment Loan

noreply@blogger.com (Franklin Advantage) — Thu, 15 Aug 2013 01:43:00 +0000

Fountain Valley, CA asks:
My brother-in-law showed me a newspaper article he found saying I can use a state program to buy a home with only a 1/2% down payment. The article said that the program raised the income limits to well over what my wife and I make. What is this CHDAP or CalHFA program? How do I use it to buy a home with only a 1/2 % down-payment?

Franklin Advantage:
The California Housing Finance Agency (CalHFA) offers the California Homebuyers Down-payment Assistance Program (CHDAP). Using the CHDAP program with FHA allows First Time Home Buyers in California to buy a home with as little as ½ percent down-payment.

How do you get a 99 ½ percent home loan? We secure you a FHA home loan as the first mortgage at 96 ½ percent of the sales price and combine it with a 3 percent second mortgage provided through CHDAP.

The ½ percent down-payment and any closing costs can be from savings or a gift. The CHDAP second’s payments are deferred so there's no monthly payment. The loan becomes due in full when you refinance or sell the home. However, CHDAP may be subordinated in some cases at the time of refinance when a hardship can be documented.

Do you qualify?

Borrower Requirements for CHDAP
• Be a first-time homebuyer and intend to live in the home as your primary residence.
• Your income must be less than the maximum allowable CHDAP income limits.
• The sales price of the home cannot exceed CalHFA’s sales price limits as established per county

Property Guidelines for CHDAP
• Property must be a single-family residence, this includes approved condos
• Duplexes, triplexes, etc. are not permitted
• Manufactured homes are not permitted
• Leaseholds, Land Trusts and Co-ops are not permitted
• Lot size cannot exceed five acres

Other Requirements:
• Borrowers must complete homebuyer education counseling
• The lowest borrowers middle credit score must be 640 or greater
• Your monthly debts including your mortgage payment, minimum credit card payments and car payments cannot exceed 43 percent of your gross monthly income.

Also, co-signers can be added to the loan to meet the 43 percent maximum debt ratio. The co-signers income is NOT counted in the maximum allowable CHDAP income limits but their credit scores are considered.

This month CHDAP increased their income and sales price limits. Today a family of four can buy an Orange County home for up to $673,615 as long as their family income does not exceed $100,250 annually with only a ½ percent down-payment.

To learn more about the CHDAP program and other programs available, contact or call Franklin Advantage at (800) 314-5626. Our seasoned, professional Loan Officers are available to answer your questions and guide you through the home buying process.

How Does the Mortgage Interest Deduction Save Me from Paying Taxes?

noreply@blogger.com (Franklin Advantage) — Fri, 02 Aug 2013 04:50:00 +0000

Westminster, CA asks:
I am getting clobbered by taxes. My brother says that I need to buy a home because the mortgage interest is tax deductible. How does the mortgage interest deduction save me from paying taxes?

Franklin Advantage:
To understand the benefits of the mortgage interest deduction, you need to understand that you do not pay taxes on your total income: you pay taxes on your adjusted income.

Your adjusted income is your total income minus your deductions. Mortgage interest is a deduction.

For example:
You and your spouse earn $80,000 a year. A couple with an adjusted annual income between $67,901 and $137,050 are in a 25% tax bracket.

Rent is not deductible. Your adjusted annual income would remain the same at $80,000. Your tax liability would be $20,000 ($80,000 * 25% = $20,000).

If you paid $12,000 in mortgage interest (about a $1,000 a month). Your adjusted income is $68,000 ($80,000 - $12,000 = $68,000). At $68,000 your tax liability would be only $17,000. That’s $3,000 less taxes.

When you consider that property taxes are another deduction that come with home ownership, your tax savings add up.

The example above is a very general overview of the mortgage interest deduction. I am not an accountant. For a more detailed of all the tax benefits of home ownership you should talk to a tax accountant.

If you would like to compare the tax savings benefits of owning a a home to renting, please contact Franklin Advantage or call us at (800) 314-5363. Our seasoned, professional Loan Officers are ready to help you.

What are the "Three C's"?

noreply@blogger.com (Franklin Advantage) — Thu, 18 Jul 2013 18:46:00 +0000

Redondo Beach, CA asks:

My Aunt was a Realtor in the 1980's. I told her I was worried about getting pre-approved for a home loan because I have heard that it is very difficult today. She told me that I had nothing to worry about as long as I had my "Three C's". What are the "Three C's"? What do they have to do with getting a mortgage?

Franklin Advantage:

The "Three C’s" were the cornerstone of lending 25 years ago and five years ago they came back with a bite!

The Three C’s: Capacity, Credit and Collateral are:

• CAPACITY: You need to show that you have the ability repay the loan. Are you doing great right now but had a tough time last year? The underwriter wants to see you will be able to make your payments even in the tough times. They won’t just look at your best two months; they will average your income over the past two years.

• CREDIT: You need to show that you are willing to pay. The ability to make payments is important but the ability alone won’t get the money to the bank. You need to show you have a good track record of making your payment on time. That track record is your credit report.

• COLLATERAL: The home you are purchasing; the property that the lender will lien; what the lender has as protection against losses if everything goes terribly wrong.

Did you notice what is not part of the "Three C's"? A down-payment is not a guarantee against delinquencies. VA loans traditionally have lower delinquency and foreclosure rates than FHA loans even though most VA loans require no down payment. During the mortgage meltdown a few years ago, VA loans had lower delinquency rates than conventional loans with 20 percent down payments.

Don't let a small down payment deter your from buying a home.If you are stronger in one C and maybe not as strong in another; underwriting allows for exceptions. Contact or call Franklin Advantage at (800) 314-5626

Is there a No PMI loan?

noreply@blogger.com (Franklin Advantage) — Wed, 03 Jul 2013 05:00:00 +0000

Rancho Cucamonga CA asks:

Is there really a loan available that offers only 5% down payment with no PMI?

Franklin Advantage:

Yes, sorta… Lender Paid Mortgage Insurance or LPMI is a way to avoid paying traditional mortgage insurance (PMI).

LPMI is a one time fee paid upfront by the lender to eliminate the monthly PMI. The fee (like the rate you would pay for monthly PMI) depends on your down payment, credit scores and other risk factors. To pay this fee the lender will increase your interest rate. The higher rate will net the lender more funds on the secondary market to pay the LPMI.

The payment on a a LPMI loan is usually lower than a traditional loan with monthly PMI.

But LPMI is not for everyone.

If you plan on keeping your home and not refinancing, traditional monthly PMI may be a better option. With traditional monthly PMI, the interest rate is lower. And in a few years when your loan reaches either 78 percent of your home’s purchase price or appraised value when you secured the loan; you will be able to drop the monthly PMI.

With LPMI you are stuck with the higher increase to your interest rate for the life of the loan.

Call Franklin Advantage at (800) 314-5626 for more details on LPMI. Our seasoned, professional Loan Officers are always available to answer your questions.

Home loan can be declined after underwriter reviews tax returns

noreply@blogger.com (Franklin Advantage) — Fri, 21 Jun 2013 23:24:00 +0000

Cypress, CA asks:
I was told that Fannie Mae and FHA underwriters require my tax returns to approve my home loan. I’m worried because I’ve heard that some people have had their loan applications declined after the underwriter looked at their taxes. Other than normal deductions; my taxes are pretty standard. What could be on my tax returns that could hurt my chances of getting a mortgage loan?

Franklin Advantage:
I’m often asked why the Loan Officer wants to see an applicant’s tax returns when the borrower is not self-employed. It’s used to be that a borrower’s last two years W-2’s and most recent paycheck stubs were enough. But that changed when underwriting became much stricter.

Fannie Mae and Freddie Mac require all lenders to provide tax transcripts from the IRS with all loans for purchase. An IRS Tax Return Transcript is a typed line-by-line copy of what was entered on your original Federal Tax Return. Therefore, a Loan Officer must review your tax returns to make absolutely certain that there are no items that can affect your ability to qualify for the home loan.

One of the most common items on a tax return that can significantly impact your ability to qualify can be found on near the bottom of the Schedule A. Here on line 21 of the Schedule A the taxpayer can claim "Unreimbursed Employee Expenses." These are expenses related to your job during the tax year such as miles driven, uniforms, stationary, etc. that you accrue but are not reimbursed by your employer.

Per Fannie Mae underwriting guidelines, "Unreimbursed employee expenses ... must be factored in the (income) analysis." FHA similarly says, "Unreimbursed business (employee) expenses must be subtracted from gross income." Even the VA requires the underwriter to "Include any costs ... associated with the applicant’s (or spouse’s) employment" when qualifying the veteran.

Other items on your tax returns that can hurt your ability to get a home loan include:
• A hobby as a side business where the income is less than the expenses
• Investment properties where the rent does not cover the payments and expenses
• Losses from a Partnership, Corporation or an S Corporation

Submitting your application to underwriting without the Loan Officer reviewing your tax returns can lead to an unexpected denial.

Contact or call Franklin Advantage at (800) 314-5626 and let one of our seasoned, professional Loan Officers review your situation and help you get pre-approved for your next home purchase.

When Fannie Mae and FHA underwrite Partnership Income

noreply@blogger.com (Franklin Advantage) — Sat, 08 Jun 2013 18:45:00 +0000

Laguna Beach, CA asks:
My wife and I are partners in a family business. We would like to know how Fannie Mae or FHA underwriting guidelines calculate income from a partnership. What documentation will a Fannie Mae or FHA mortgage underwriter require for a business partnership?

Franklin Advantage:
There are four different ways that a business can be structured and reported for legal and tax reasons. A business can be a sole proprietorship, a partnership, a corporation, or an “S” corporation.

A partnership is formed when two or more people form a business and share profits.

Fannie Mae, Freddie Mac, FHA and VA underwriting guidelines for a business partnership require that the mortgage underwriter initially calculate the partnership income by reviewing the applicants "Schedule K-1 (Form 1065)". The Schedule K-1 is attached to the borrowers Federal Tax Returns (1040's).

Line 4 of the Schedule K-1 shows "Guaranteed Payments". The underwriter will count this income if it has been consistent or increasing over the past two years.

Line 1 of the Schedule K-1 shows "Ordinary Income or Loss". If there is a loss, the underwriter will subtract the loss. On the other hand, the underwriter will add ordinary income from the Schedule K-1 to borrower’s income if the income is continuous and on-going over the past two years. Also, if partnership tax returns are required, the income will not be added if the partnership shows losses.

If Line J of the Schedule K-1 shows the partner has a 25% or more ownership interest in the partnership, Partnership Tax Returns (IRS Form 1065) will be required.

In a general partnership, each partner is personally liable for the debts of the entire business and is responsible for the actions of every other partner. In a limited partnership, a limited partner has limited decision-making ability and his or her liability is limited to the amount he or she invested in the partnership.

If Line G of the Schedule K-1 identifies the borrower as a general partner, Partnership Tax Returns are required.

The underwriter’s analysis of the Partnership Returns will enable the underwriter to calculate adjustments to the income or losses reported on Schedule K-1. Any income or losses from this analysis is limited to the borrower's percentage of ownership reflected on the K-1.

The underwriter will add back non-cash losses. These include "Depreciation", "Depletion" and "Amortization/Casualty Loss". All can be added back into the cash flow of the partnership.

The underwriter will subtract income that is not consistent and recurring. "Other Income" most often is subtracted as it is not part of the normal business income and therefore is not considered consistent and recurring.

Also, the underwriter will subtract "Mortgage or Notes Payable in Less than 1 Year". These obligations may significantly affect the financial operations of the business. If you can provide documentation to evidence that these liabilities regularly rollover; no deduction is necessary.

Lastly, the "Meals and Entertainment Exclusion" will be subtracted since it is an actual cash expense.

Once the underwriter adjusts the partnership income for all expenses; the underwriter will re-evaluate the partnership’s overall financial stability. If the partnership shows decreasing income or continuing losses, this may negate all or part of the income reflected on the Schedule K-1. Any additional income is limited to the borrower's percentage of ownership reflected on the K-1.

I'm sure this all seems very overwhelming and I do not recommend that people without mortgage experience attempt to underwrite their own applications. Call or contact Franklin Advantage at (800) 314-5626 and let our seasoned, professional Loan Officers help you cut your way through the paperwork jungle.

How does FHA and Fannie Mae calculate self employed income?

noreply@blogger.com (Franklin Advantage) — Wed, 29 May 2013 18:00:00 +0000

Huntington Beach, CA asks:
When looking for a home loan, I was told by my bank that my husband is considered self-employed. They said that they could not use his income because our taxes show a loss. How does a mortgage underwriter calculate a self employed person's income? What are the underwriting guidelines for the self-employed?

Franklin Advantage:
Fannie Mae, FHA and VA considers anybody that has a 25 percent or greater ownership in a business to be self-employed.

There are four different ways that a business can be structured and reported for legal and tax reasons. A business can be a sole proprietorship, a partnership, a corporation, or a “S” corporation.

For now, I will assume your husband's business is a sole proprietorship.

A sole proprietorship is a business where the ongoing success of a sole proprietorship depends solely on the business owner who owns it. His or her death would end the business.

In a sole proprietorship there is no distinction is made between the owner’s personal assets and the assets used in the business. The business checking account balance and the tools of the business belong to the business owner. Conversely, the business owner is obligated for all debts of the business.

The income or loss from a sole proprietorship is reported on a "Schedule C". A Schedule C is a year end Profit or Loss for the business. It shows the total income for the business in the previous year and shows the expenses the business spent earning that income. It is attached to and made part of the borrowers federal tax returns (1040's).

When calculating the income from a Schedule C , Fannie Mae and FHA guidelines require the mortgage underwriter will take the net income (total income minus the expenses) and add back expenses that are considered "non-cash" business expenses. These expenses include depreciation and depletion (loss of value over time).

Fannie Mae and Freddie Mac guidelines also consider the "use of home" a non-cash business expenses. Fannie and Freddie underwriting also subtracts the "meals and entertainment" expense and in essence, count it against the borrower twice since that tax code only allows it to be claimed at half of actual cost. FHA and VA underwriting guidelines do not make either of these adjustments.

Capital Gains and Losses shown on a "Schedule D" are almost never counted as income. This is because a capital gain or loss is usually a one-time event. But there is an exception.

If the borrower’s business has a constant turnover of assets that produces regular gains and losses, the capital gain or loss may be considered. For example: if the borrower's business is buying of old houses, remodeling them and selling them for profit; the underwriter can average of the past two years’ gains or losses for consideration in the income calculation.

Call or contact Franklin Advantage at (800) 314-5626 and a professional, seasoned Loan Officer can review your qualifying options.