Today’s ramblings of a lunatic mortgage broker

According to the Salt Lake Board of Realtors home sales in Salt Lake County were down 25% from last year, but the median home price fell less than expected, only 1.3% across the board.  So there’s some good with the bad.

According to this article in the Salt Lake Tribune today, homes in the under $300,000 category are moving well, but those above are spending much more time on the MLS, and sales above $600,000 are almost non-existent.

I feel that home prices are coming down, and sales are slowing down because of several factors:

One major influence on the decline of home prices is that homes are settling into the price range that the average Utah household can afford.  The median income of a W2’d household in Salt Lake City is just a bit more than $60,000 a year, which qualifies them to buy about a $210,000 home.  Those that sign the front of the paycheck, the entrepreneur and business owners that employ W2’d employees and personally make more than $60,000 a year, usually don’t W2 themselves and instead file a Schedule C or K with their 1040’s.

The elimination of stated-income loans leaves the self-employed or business owner borrower at a huge disadvantage when seeking financing.  Self-employed people usually pay themselves a “reasonable” salary for running their business to minimize the income taxes they pay (self-employed people pay an additional 15% self-employment tax on top of everything else that their W2’d employees pay).  Stuff W2’d employees pay for out of their personal income, like their cell phones, car payments, auto insurance, gasoline, etc., a self-employed person pays for out of the business to minimize both the business taxes and minimizing the salary the owner draws from the business, thus decreasing their personal income tax, too.  Business owners still pay for the same things their W2’d employees do, but where the money comes from is shifted around to minimize taxation, to the detriment of documentable personal income.  The self-employed person or business owner may legitimately have made $300,000 last year and can honestly afford a $900,000 home, but on paper they only made a “reasonable” salary of $50,000 and thus that was their taxable income that will be used under the current underwriting guidelines to qualify them for a loan.  So the self-employed borrower will only qualify for a $165,000 loan (hence the reason homes over $300,000 are not selling so well).

This is very evident right now with the current refi boom, where these self-employed borrowers with excellent credit scores can’t qualify to refinance the home they bought five years ago, even though they obviously are good for it.

To make a huge difference in the economy right now either Fannie Mae, Freddie Mac and FHA will have to develop new underwriting guidelines for self-employed borrowers so that they can buy new homes, right now, or self-employed people will have to go back and amend their last two years of tax returns and pay income taxes on the amended amount, or wait two more years for self-employed borrowers to file returns that more accurately disclose actual personal income and the higher taxes that go along with it.  The latter solution won’t help the economy any time in the near future.

My solution: Allow the self-employed to use alternate forms of proof of income, like bank statements, or allow a self-employed borrower to use a percentage (say 75%) of their Schedule C income to qualify.  After all, the current guidelines allow a W2’d borrower to use their gross income with no regard for what they spend their money on other than debts that show on a credit report, shouldn’t the self-employed be given the same consideration?

Another reason is one I’ve been harping on all week, stricter appraisal guidelines that lenders will accept, which is making it difficult to accurately value your home.

In Salt Lake City the cause of lower home values that is currently carrying the least weight is foreclosures since our unemployment rate is half of the national average.  But we are seeing more short sales, which is when a homeowner sales their home for just what they owe on it or less if the bank agrees on it.  Some homeowners are having to do this just to sell their house because borrowers can’t qualify for the higher price under current underwriting guidelines.

The plus side to all this is if you are a W2’d wage earner and can provide documented proof of your income and have a 620 FICO score or better, you are pretty much golden to buy a home right now, and some at really good deals.

All that said, here’s today’s rates:

For Salt Lake City, UT today’s average mortgage rates are as follows:

30-year fixed: 5.25%

15-year fixed: 5.125%

Conforming Jumbo 30-year fixed: 5.75%

FHA 30-year fixed: 5.50%

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