Mortgage Qualification Questions

[haha]

I haven't found a place I want yet, but I will, and when I do I would like to know what to expect in mortgage shopping and qualifying.

About 6 months ago I got pre-qualified smoothly enough, but I noticed that they are real sticklers, and it is not like you can sit down with the underwriter and explain where the money to pay his loan is going to come from. They want to see cash income, and they are skeptics on the 4% religion. My cash income was higher earlier, but I sold some stocks and discontinued my SS since then. So I am protecting my nut, but at today's pathetic interest rates it would take about $5mm to qualify on interest payments alone from safe securities. I do not really want to mess with my investing discipline to amp my short term income. The day after I bought some high yielding securities we would get a crash.

So my idea that I would like to float is this- can I buy a 1 or 2 year period certain annuity, or something similar to this? It seems that at worst I would give up some expenses, but gain the ordinary income to make the loan originator happy.

Any ideas, objections, or possible pitfalls? I have never seen any indication that I would have to warrant that I will get my income into the indefinite future, any more than a worker has to warrant that he will always be employed.

I guess another possibility would be to buy a very short term 1st mortgage. The point is turning return of capital into income.

Ha

 

[FIRE'd@51]

If you are close to having to take RMD's from your IRA, I would think they would count as income, and then you could use the mortgage-interest deduction to offset them.

 

[haha]

If you are close to having to take RMD's from your IRA, I would think they would count as income, and then you could use the mortgage-interest deduction to offset them.

Next year. This year I am making fairly large Roth conversions, as I am bearish about taxation in the intermediate future, and this is my last shot before SS and RMDs kick in.

Perhaps lenders will count the conversions too?

Ha

 

[Brat]

Contact Rhonda Porter, the mortgage professional who posts on the Rain City Guide. I am sure she would tell you how this all this all works.

 

[haha]

Thanks Brat.

Ha

 

[Tadpole]

I am in the middle of selling a house in MD (close 24 Nov if nothing goes wrong) and buying a house in WA (close 1 Dec if nothing goes wrong). Because of the uncertainty I decided to take out a 5/5 ARM at PenFed, no closing, no pre-pay penalty, etc.

I am astonished at how they are looking at our income. They want current income, retirement income from SS and pension, etc. Like others I found that they wanted a lot of documentation on pensions and SS but trusted me with just telling them my deferred and Roth savings balances and where they were held. The potential income from our savings is substantial even though we won't be spending it until we need it. Now they got our FICO scores - 840 for me and 833 for my husband. Still, they are coming back with requests for documentation. They have bank statements showing that we could live off just our emergency fund for a couple of years even without SS and pensions and even if the closing on the MD house failed. Yet the requests for documentation keeps coming.

I have bought many houses in my life and have never seen so much scrutiny for a loan. I can give them documentation that I could pay for this house several times over if I tapped my deferred savings. And, the request for documentation still comes. The last one was the utility bills on the MD house. I am beginning to wonder if this loan will be approved by the closing date.

They must also suspect that I will pay off this loan soon after I have the money from the MD house in hand. Good grief, the monthly payments on the arm will be only $950, less than the payments on our current house were ten years ago.

So, yes, my experience is that personal wealth is practically being ignored and pension and SS projections (I retire in December) are the only income that is being considered in evaluating whether I am good for the loan.

Strange times.

 

[chinaco]

... Like others I found that they wanted a lot of documentation on pensions and SS but trusted me with just telling them my deferred and Roth savings balances and where they were held. The potential income from our savings is substantial even though we won't be spending it until we need it. ...

I doubt they trust you (or anyone else) on any savings... they are interested in a reliable income stream.

Those accounts are protected (in most states) and you could lose that money by making investment mistakes or just spend it on other things.

Unless you use some assets as collateral (in addition to the house to secure the debt)... they may not take much of it into account for the loan.

 

[chinaco]

You could probably use a period certain annuity to bridge the income gap until other income streams come on line.


The bank is going to be very conservative and want to see a reliable income stream.

Tax deferred accounts are often shielded. You could be a bad investor (from their perspective) and lose your securities in the market.

I suspect if you bought some treasury notes and placed them in an account at the bank where they could place a lien on it (and control it)... they would use it as additional collateral for the loan. You could probably even have the coupons placed in a separate account (so you could use it) and just have the principal of the note used as collateral. However, this approach might defeat part of your overall goal.

 

[Gumby]

We refinanced two weeks ago with our local bank (about three blocks away from the house). It is the same bank we have had for the last 20 years and this is our fifth refinance with them. Not once have we taken any cash out and the loan/value ratio, even in this collapsed market, is less than 20%. We could pay the loan off from taxable savings if we wanted and we have 820 FICO scores

And yet, even with all that, they were extremely demanding in the documentation requirements -- multiple paystubs for the young wife and me, both at the time of the application and again right before the closing; actual printed account statements for each and every account -- sheltered and taxable; an executed IRS form 4506 so they could get tax returns (they wouldn't even take my copy of the returns). And they also took their sweet time in approving the loan.

The bank has always been conservative (e.g. - they only lend locally and do not sell their mortgage loans) and has not had any problems during the meltdown, so I suspect this is part of a general paranoid overreaction on the part of the entire financial industry. I feel sorry for anyone trying to refinance with less than stellar credit and a higher L/V ratio. While lending to anyone with a pulse was unwise and not good for our country, it strikes me that neither is the current paranoia. Without lending and borrowing, our economy cannot grow.

 

[ERD50]

Perhaps lenders will count the conversions too?

Ha

I was under the impression that the AGI line of your 1040 was the solid definition of "income", regardless the source. I seem to recall that someone on this forum reported that the Roth conversions absolutely did count as "income" - it's right there as part of your AGI of your 1040.

Seems stupid, it's a transfer of money from one account to another. So they count that, but seem to put little value to actual the assets. I suppose they want to keep it simple and straightforward, but it's not like rocket science to break out some of this stuff, and it sure would seem to be within their sphere of expertise.

I'd check with the mortgage people, but I think your best bet is just to make sure your AGI is up where you need it to qualify for whatever size loan you want. And thanks for helping to reduce the national debt!

-ERD50

 

[Martha]

My understanding is that current underwriting standards generally require you to show that any income you are bringing in will continue for the next three years. So, your annuity may have to run that long.

 

[youbet]

And yet, even with all that, they were extremely demanding in the documentation requirements -- multiple paystubs for the young wife and me, both at the time of the application and again right before the closing; actual printed account statements for each and every account -- sheltered and taxable; an executed IRS form 4506 so they could get tax returns (they wouldn't even take my copy of the returns). And they also took their sweet time in approving the loan.

.

These requirements don't seem "extremely demanding." Everything makes sense and would be quick and simple to gather up and bring in. Were you expecting they'd approve on the spot with a verbal commitment and a handshake?

I'm delighted to hear that banks and credit unions have returned to generally requiring down payments and proof of incomel

 

[lowflyer]

Were you expecting they'd approve on the spot with a verbal commitment and a handshake?

That's funny! We are also in the process of refinancing and while they are not being overly demanding, they do want solid documentation. Sometimes we think we should get preferred treatment because we have a pot of money and a good FICO score, but underwriters want more these days. Probably a good thing.

 

[Gumby]

These requirements don't seem "extremely demanding." Everything makes sense and would be quick and simple to gather up and bring in. Were you expecting they'd approve on the spot with a verbal commitment and a handshake?

I'm delighted to hear that banks and credit unions have returned to generally requiring down payments and proof of incomel

Given that they never demanded anything but a filled out application and one pay stub from us the last four times we refinanced, I would say yes, they were overly demanding about the paperwork under the circumstances. I consider the IRS form 4506 in particular to have been overkill, since we are both still employed and not counting on any other income. In my view, all they really needed to know is that our pay could cover the payments given any other obligations we have, which is something easily determined by a credit check and a pay stub, and that the collateral could cover the loan (i.e - we have over 80% equity) which is easily determined by their appraiser.

Oh, and if you do all of your investing online, getting an actual hardcopy account statement is not always so easy.

 

[Dimsumkid]

I'll add this: on top of the tax forms and financial statements others have mentioned, we put down over 30% to prove financial security to our bank, this was our 2nd house/mortgage with them, 1st house was paid off years ago. We have excellent credit scores (both over 800) and backed with more assets than value of the house. They wanted us to bring brokerage prints that we used for asset backing within 2 days of the closing to prove we didn't removee the assets out of the accounts...as if we just did it to show them only for a bait and switch! I was asked more detail on the 30k self employment income than on anything else, like it was going to matter! It was silly stuff too, like what are my expenses and taxes? Even if it was 100%, I still had the assets for 150% of the house value.

 

[youbet]

Given that they never demanded anything but a filled out application and one pay stub from us the last four times we refinanced, I would say yes, they were overly demanding about the paperwork under the circumstances. I consider the IRS form 4506 in particular to have been overkill, since we are both still employed and not counting on any other income. In my view, all they really needed to know is that our pay could cover the payments given any other obligations we have, which is something easily determined by a credit check and a pay stub, and that the collateral could cover the loan (i.e - we have over 80% equity) which is easily determined by their appraiser.

Oh, and if you do all of your investing online, getting an actual hardcopy account statement is not always so easy.

Your points are well taken but.......

Given that the rules need to apply to everyone without exception, I don't really see anything unreasonable in their requests. And I'd rather see my bank err to the conservative side than the liberal. It seems like we just finished a period fraught with issues regarding loaning money to poor risks.

The procedures for determining and documenting the borrower's financial status and ability to pay need to be the same for all regardless of whether he/she plays golf with the bank pres, attends the same church, is one race or gender or another...... etc. Therefore the bank's procedures need to be adequate to weed out the lowest common denominator, even if they offend someone of your status by seeming to be "unreasonable" or intrusive.

 

[youbet]

I'll add this: on top of the tax forms and financial statements others have mentioned, we put down over 30% to prove financial security to our bank, this was our 2nd house/mortgage with them, 1st house was paid off years ago. We have excellent credit scores (both over 800) and backed with more assets than value of the house. They wanted us to bring brokerage prints that we used for asset backing within 2 days of the closing to prove we didn't removee the assets out of the accounts...as if we just did it to show them only for a bait and switch! I was asked more detail on the 30k self employment income than on anything else, like it was going to matter! It was silly stuff too, like what are my expenses and taxes? Even if it was 100%, I still had the assets for 150% of the house value.

As with Gumby, I don't see anything unreasonable about the requests the lender made of you. They asked probing questions so they'd know and be able to document your financial status and asked for backup so that they'd know you (or any other applicant that walked in off the street) was being truthful. You complied and got your loan. Someone not qualified or not being truthful would have been denied. Sounds like it's working to me!

Is it the fact that you didn't get some sort of special consideration that's bothering you?

 

[Dimsumkid]

As with Gumby, I don't see anything unreasonable about the requests the lender made of you. They asked probing questions so they'd know and be able to document your financial status and asked for backup so that they'd know you (or any other applicant that walked in off the street) was being truthful. You complied and got your loan. Someone not qualified or not being truthful would have been denied. Sounds like it's working to me!

Is it the fact that you didn't get some sort of special consideration that's bothering you?

Nothing's bothering me at all, I was just trying to give an example of what to expect since Ha was asking. I found it odd to question $30k in self employment, when I put down more than 30% of the loan, $183k, to help secure the finances. If anything, why question such a small amount of this loan?

 

[harley]

Oh, and if you do all of your investing online, getting an actual hardcopy account statement is not always so easy.

Actually, it is easy. Just pull up the online statement and click "Print".

Seriously, I have accounts in 3 different banks and 3 different brokerages, and that's all I've ever had to do. It's all they ever did back when they were mailing them to you, too. Never had a single complaint from IRS or mortgage people. Often I'll use Bullzip (PDF printer) and email them a copy, and that's good enough.

 

[Brat]

Actually, it is easy. Just pull up the online statement and click "Print".

Seriously, I have accounts in 3 different banks and 3 different brokerages, and that's all I've ever had to do. It's all they ever did back when they were mailing them to you, too. Never had a single complaint from IRS or mortgage people. Often I'll use Bullzip (PDF printer) and email them a copy, and that's good enough.

When I applied for a re-fi at PenFed they wouldn't accept the printout of an online statement.

 

[harley]

Was that recent? I am in the process of a refi with MetLife, and they had no problem with it. Weird.

 

[Gumby]

Your points are well taken but.......

Given that the rules need to apply to everyone without exception, I don't really see anything unreasonable in their requests. And I'd rather see my bank err to the conservative side than the liberal. It seems like we just finished a period fraught with issues regarding loaning money to poor risks.

The procedures for determining and documenting the borrower's financial status and ability to pay need to be the same for all regardless of whether he/she plays golf with the bank pres, attends the same church, is one race or gender or another...... etc. Therefore the bank's procedures need to be adequate to weed out the lowest common denominator, even if they offend someone of your status by seeming to be "unreasonable" or intrusive.

As I mentioned in my first post, I agree that we were not well served by a banking industry that loaned to anyone with a pulse; NINJA loans should never have existed. But I still maintain that when 1) the collateral is demonstrably worth at least 5 times the loan balance and 2) the credit check and pay stubs establish that our debt service to income ratio is less than 5%, that should be sufficient. Particularly given the fact that we have been making mortgage payments to this very bank on time or early for the last 18 years, and the fact that the payments under the new loan are substantially less, at some point an individual at the bank should be able to exercise some reason and say "You know, it is almost certain this loan will perform and we're well covered if it doesn't. Why bother with tax returns?"

In my view, the current paranoid approach and the former laissez-faire approach are two sides to the same coin. No one is exercising any judgment as to the actual risk that is being undertaken by the bank; they are simply mechanically applying rules (or, in the past, not applying them). Neither approach serves our economy well.

 

[youbet]

I found it odd to question $30k in self employment, when I put down more than 30% of the loan, $183k, to help secure the finances. If anything, why question such a small amount of this loan?

I bet they were just following a procedure that called for questioning all income stated on anyone's application. If they didn't based on the fact you would have qualified even without that income, they're tacitly accepting it.

These days lending institutions are under much (deserved) scrutiny. They have procedures in place which, if followed to the letter, will allow them to pass muster if audited. I don't think you're going to see a lot of shortcuts based on "common sense" but which skip or alter the documented procedures, at least until the heat from the gov't lets up.

 

[youbet]

In my view, the current paranoid approach and the former laissez-faire approach are two sides to the same coin. No one is exercising any judgment as to the actual risk that is being undertaken by the bank; they are simply mechanically applying rules (or, in the past, not applying them). Neither approach serves our economy well.

I suppose this is the basis of our disagreement on this. I think the lending institutions need documented, tough lending standards, compliant with current legal mandates, where claims are backed by evidence. I'm less open to "exercising.....judgment." I think it's a slippery slope which leads to variation in standards, discrimination based on non-financial issues such as race, gender, social status, friendships, etc., and that it's worth the inconvenience of providing extensive backup to prove our situations.

But I understand fully that there are other points of view and respect those even though I disagree with them. I'm glad you got your refinancing done OK despite the inconvenience.

 

[Gumby]

I'm less open to "exercising.....judgment." I think it's a slippery slope which leads to variation in standards, discrimination based on non-financial issues such as race, gender, social status, friendships, etc., and that it's worth the inconvenience of providing extensive backup to prove our situations.

I see your point on this. It certainly helps prevent discrimination on non-financial bases to have documentation requirements set in stone. But you surely would expect a bank to discriminate on the basis of financial issues, and legitimately so -- that's a loan officer's job. I guess I'm just hoping for some happy medium, where intelligence makes an occasionally foray into the process.

In the grand scheme of life, this was merely a trifling annoyance for me, but I could see it presenting a real problem for some people.