Posts Tagged stated income

So what’s it take to get a home loan these days?

The last year has seen many changes in home lending, some for the better, some for the worse.  Over the next couple of blog posts I’ll cover these changes and what is required to get approved for a home loan in today’s lending climate.

Full Doc loans only

In today’s lending climate only Full Doc loans are available.  These are loans where documentation to prove income and assets stated on the credit application must be provided.  Documentation includes such items as W2’s, 1099’s, and tax returns.  Assets must be supported by bank statements, IRA statements, statements from stocks and bonds, etc.  All down payment funds must be sourced and seasoned at least for 60 days back from the application date.

At this time Stated Income loans are a thing of the past.  Obviously this puts many self-employed borrowers at a huge disadvantage since many do everything possible with itemized deductions to reduce their tax burden.  Many times tax returns will not reflect the actual income of the borrower, but Line 37 of Form 1040 is the last word on what a lender will base a borrower’s ability to repay the loan on.  Lenders do allow some itemized deductions to be added back-in, however these allowed items rarely increase the Adjusted Gross Income by much.

Hopefully Fannie Mae, Freddie Mac, FHA and VA will change some of their guidelines in the near future to help accommodate the self-employed; maybe by allowing a percentage of Line 1 of  Schedule C as qualifying income or allowing more itemized items to be added back into Adjust Gross Income.

If you have any questions regarding becoming qualified to purchase a new home (and it truly is a good time to do so) or any other mortgage-related item, please do not hesitate to call me at (801) 971-7916.

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The good with the bad in Salt Lake City

There is good news, and there is bad news, right now it’s a mixture of both in Salt Lake City.

First, the bad news: AllPro Realty, one of Salt Lake City’s big brokerages, has gone out of business. Bankrupt. Kaput. Gone. They left many Realtors broke by not paying them the commissions they have due. And to add insult to injury, it appears they have used the money owed to others to open-up under a different name with the owner of AllPro Realty’s son-in-law being listed as the primary broker of the new company. Very unethical.

In the good news category: Sales of existing homes in Salt Lake City and Salt Lake County was up 13% in September.  The overall reason why isn’t clear yet, but some of it may have to do with FHA’s announcement that one October 1, 2008 they would stop allowing certain types of down payment assistance like Nehemiah.

I still hold that FHA’s data is flawed and that the rate of foreclosures amongst those receiving seller-assisted down payment is no different than those that received family-assisted down payment, but we still having non-real estate people making real estate policy in Washington. We have rich politicians who don’t have any issues making a down payment on a new home making policy for those that don’t make as much money as they do: Joe Mainstreet.  Or more to the point right now: Joe Plumber who only makes $40,000 a year or so.

But off my soap box and back to the subject at hand. Sales are up. Hopefully it’s a trend that will continue with just an occasional stumble.

The trade-off has been that prices are down.  The average price of a home in Salt Lake County has fallen 9.46% over the past 12 months from $243,000 to $220,000.  Why? Here’s my thinking. First and foremost, home prices in Salt Lake City increased around 55% from 2003 to 2007, I feel driven by the availability of Stated Income loans that were used to buy more house than someone would qualify for via a Full Doc loan. This allows sellers to ask more and buyers to bid against each other, artificially increasing the value of homes. And what is the value of a home? Whatever someone will pay for it.  The kicker is Utahn’s incomes did not increase by an equal amount.

Now with the elimination of almost all Stated Income loan products, more Utahns are qualifying for less home.  But more realistic in relationship to their income and what they can afford.  This is bringing home prices back into a realistic range.  You see, the average household in Salt Lake County makes about $60,000  a year, which qualifies them for a $211,000 loan.  So I think we’re seeing average home prices sink back to the range of the average Utahn’s documentable income.

Second, although Utah hasn’t been hit by the foreclosure problems that other states have, there has been some, and homes selling at auction below market value, or homes being short-sold to sell them before they go to auction is driving down values since a major indicator of appraised value is comparable sales within a given area around the property being appraised.

For those that document their income the market is very good, and it’s a very good time to buy.  Rates are still historically low and homes have become more realistically valued for the area, and contrary to what you hear on the news banks are still funding loans. Wall Street is hurting, but Main Street is a bit more insulated because not everyone on Main Street is a rich investor in the Stocks and Bonds markets.

If you or anyone you know has any questions on their current mortgage, please contact me.  I’m always happy to answer them.

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The future of Utah real estate

Interest rates up. Home prices down. What’s it all mean?

Where is Salt Lake City headed in the real estate market now? What are interest rates for Utah borrowers going to do? Is my house in Sandy losing value?

All good questions and ones I get asked often when someone finds-out I am a mortgage broker. So here’s my predictions for why Salt Lake City in particular, and Utah in general are going to be better-off than the rest of the country when it comes to real estate and mortgages.

  1. Utah is a growing state. Whether that growth is coming from outside the state or from within, we are growing. Utah culture is good for real estate. The underlying idea in Utah is get married, buy a house and start a family. And that family usually consists of four or more children. Utah leads the nation in the number of children per household. All those kids are going to need homes to raise more kids. So unless something drastic happens and Utahns stop having kids at the rate they are, there will always be demand for homes.
  2. People are moving into Utah. Utah is attractive to those fleeing bigger cities. Salt Lake City is not too big, but also not too small. For someone from a large city it’s just right. Also, Utah is a non-union state, so it is very attractive to companies who wish to set-up shop here for cheaper labor than in other parts of the nation. Utah also has a very tech-savvy population, so high tech companies have a huge employment pool here. These companies also bring-in their own employees, thus creating a need for homes, and hiring Utahns allows them to afford homes.
  3. Utah has one of the lowest unemployment rates in the nation. The number one reason for foreclosures is not sub-prime lending. It is not option arms. It is loss of some or all of a family’s income. Check the statistics. The highest foreclosure rates in the U.S. coincide with the highest unemployment rates in the U.S. (California and Nevada being the exception since much of that is “investors” that screwed-up the markets there). Utah has a low unemployment rate and one of the lowest foreclosure rates in the U.S.
  4. While other areas in the U.S. are seeing sometimes double-digit drops in home values, property values in Utah has actually increased 2.5% over the first six months of 2008

All that said though, what is going to effect us is this:

The days of Stated Income loans is not gone, but what is left is highly unattractive to buyers and very demanding of them.

Why does this make a difference? Because a house is worth whatever someone will pay for it. Stated Income loans, in my opinion, were a huge contributor to unrealistically driving-up home values. It artificially created a sellers-market. A seller could list their home for whatever they pleased, and if an interested buyer couldn’t qualify for the home via the full income documentation (Full Doc) route because they just didn’t make enough, they could go Stated Income and not have to show the loan officer or the lender any of their proof of income. Therefore they could now qualify to buy a home they otherwise would not have been approved for. And once that home home sold for an inflated amount, it created a comparative (comp) for someone else in the neighborhood to base the value of their home on, and so on, and so on, and so on.

It’s for this reason most of all that I feel we are going to see a drop in home values in Utah. Not for lack of demand, but for lack of qualified buyers for homes in their current price range. This is why this is:

According to the Utah Association of Realtors, the average price of a single family residence in Salt Lake County in the first quarter of 2008 was $286,321.

According to the Bureau of Labor Statistics the median household income in Salt Lake County in 2007 was $60,589 (remember back to math class, median is the exact middle of a set of numbers). So half of Salt Lake City and County residents have a household income of less than $60,000 a year and half have more. $60,000 a year qualifies a home buyer for a $195,000 loan.

So half of Salt Lake County households won’t qualify for the average home in Salt Lake City or County since they have to prove they have the capacity to pay for that home. Income hasn’t gone down in Utah over the past 10 years, but homes have skyrocketed in price because buyers could stretch the truth a bit about their capacity to repay and get that bigger home they so badly wanted.

Well, those days are over. Under the current loan underwriting guidelines the industry has gone back to the “Three C’s” of lending: Proof of Credit, Capacity to repay and collateral.

Credit. Credit standards have gotten much stricter. Even FHA now has a minimum FICO score requirement, where six months ago they didn’t. Someone with a 560 FICO used to be able to buy a house. Now, the minimum most lenders are underwriting is 620 (although some will still go down to 580 on an FHA, but they are few and far between).

Capacity to repay. Full income documentation rules right now. A borrower has to be able to prove they have the income available to afford the home they are buying. Many self-employed borrowers can’t prove they make as much as they do, and the lending industry defines a self-employed person anyone who derives more than 25% of their income from commissions or bonuses. Stated Income loans were designed to address this borrower’s needs, but the programs were abused terribley by those that could prove their income but wouldn’t because they wouldn’t qualify for the house they wanted.

Collateral. Appraisal fraud was a huge issue in Salt Lake City, Draper, Sandy and Utah overall. Nowdays, appraisals are undergoing “desk reviews” at the lenders and are being heavily scrutinized. Many a deal has been killed because an appraisal would not hold-up to close examination. This is why a good and honest appraiser is worth their weight in gold. An honest value means an honest sale price means a loan that will close and a buyer will be able to move into their new home.

So I feel that the big contributor to home prices declining in Salt Lake City and County, and Utah in general will be for the simple reason that in order to find qualified buyers home sellers will have to discount their home into the realistic price range that the majority of Utahns can qualify for. For this to not happen, lenders are going to have to get creative on ways to qualify the top 50% of Utah earners who are the small businesspeople that write-off most of their income to minimize their income tax burden. There are lots of people in Utah that can honestly afford a $400,000 plus home, they just can’t prove on paper that they can… for now.

So there you have it. The thoughts rolling around my head this week. Take care, and happy house hunting.

Cory

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