Dennis' Mortgage Blog

Question of the week:  I’m self-employed, how is my income calculated for qualifying for a new mortgage?

Answer:   I will expand the answer to include not only self-employed but also anyone who owns 25% or more in a company, those receiving commission income and those whose bonus income (yes some people are still getting bonuses) that exceeds 20-25% of their base income.

4506-T is an IRS form that all lenders use to verify that the tax returns you provide for your mortgage application are the same ones you have submitted to the IRS.  With the software available in the market to prepare tax returns it is quite simple for someone to quickly make some tax returns that result in necessary income to qualify.  On every mortgage with tax returns in the file the lender will verify the forms with the 4506-T, and yes there are still borrowers and loan officers in the market submitting fake tax returns.

Self-employed borrowers, including those with an S Corporation, LLC or Sole Partnership, will need previous two years tax returns.  All schedules will be reviewed and added back to the adjusted gross income will be any depreciation deducted as an expense.  A two year average will be used to determine monthly income.  If you have declining income then the lower income will be used; i.e. in 2008 you filed for income of $75,000 and in 2009 you filed for $69,000; we would use $69,000 for your income.

Rental Income two years of Schedule E income from your tax returns.  If the property was placed into service in the most recent year then we can use that year’s taxes.

Commission/Bonus Income  If you receive “substantial” income, generally defined as 25% of your total income, but some underwriters now dropping to 20%, from bonuses or commissions we will need the most recent two years’ federal tax returns.  Mostly we are interested in any unreimbursed business expenses filed on Schedule A (also known as 2106 expenses).  These expenses will be deducted from your gross income and then the income averaged for the two year period. 

Unless you are straight salary, W2, employee you should be prepared to provide your most recent two years tax returns with all schedules to determine your qualifying income for a new mortgage.  A note at this time of year, taxes are due in a little over two weeks, if you are closing after April 15^th be prepared to provide your 2009 returns, or a copy of the extension.

Regarding the 4506-T form and the current time of year.  If you file by mail it can take weeks for the IRS to verify that you have filed your returns.  To speed up the verification process you can either file electronically, which will still take time to confirm filing but not as long as by mail, or drive your returns to your nearest IRS office and deliver them and request a receipt/verification your forms have been filed.

Have a question for me?  Ask me!

The big news this week is the Governor signing into law a first time buyers tax credit for Californians.  It appears to take effect May 1^st, so after the Federal Tax credit expires, though I believe there is some room for the two to overlap for those fortunate enough to have perfect timing.  The tax credit is spread over 3 years and is up to $10,000.  The information is fairly new having been signed yesterday so I will have more information on it later.  The law is basically an extension of a previous tax credit that was solely for purchasers of new homes, the new law extends to those buying existing homes as well.  Better hurry as there is only $100,000,000 allocated for existing home purchase tax credits, or enough for 10,000 first time buyers.

Not a good week for the Mortgage Backed Securities (MBS) and bond markets.  Losing ground of five of the last six days, bonds are reacting negatively to a continuing over-supply of government debt (another $120 billion plus auctioned this week).  Greece’s economic woes and huge debt has weighed heavily on our markets as well as there has been back and forth as to whether and how much the International Monetary Fund (IMF) and/or European Union will support the country.  While Greece has a relatively small economy, in the EU every one is connected and the domino effect could start in Athens.

Coming to light, or at least the light is spreading, slowly through the problems Greece is having is the huge public debt in France, Great Britain, Japan and other nations.  Following along behind is the United States of America which has been selling Treasury bonds and bills by the hundred billion per week this year.  Slowly the extent of public debt is coming more to the front of investors who are wondering how it will all be paid back and when the tipping point will come when the debt load far surpasses the ability to tax for repayment.

Wednesday and Thursday our own debt auctions did not go so well after months of foreign investors gobbling up U.S. Treasury debt they sat back from the table, perhaps saying “Enough. I’m stuffed. I couldn’t eat another bite.” (a bone for your Monty Python fans) The reaction was a huge sell off in MBS. 

With little economic data of impact this week foreign and domestic debt led the markets, and for MBS the lead was down, down, down.  Today there has been some rebound from ten week lows of yesterday partly because of profit taking from stocks hitting 18 month high, partly as investors move into the safe investments of bonds due to South Korean ship being sunk presumably by the NorKos.  But even with a strong rally today we are at 4 week lows on pricing.

Underlying, or lying on top of, the rates is the looming absence of the Federal Reserve from the mortgage markets as their $1.25 Trillion purchasing program is down to a few pennies and ends on Wednesday.  Who will fill the void?  How will the market absorb so much mortgage debt while the Treasury is financing a current $3.4 Trillion deficit and Congress is working to pass a budget that will add over $10 Trillion to the deficit in the next decade? 

Rates are due for a big run up in the coming months.  Between the government hogging the market with oversupply, the Feds absence of support and Fed governors saying the “extended period of low rates” needs to no longer be the official rate statement of the Fed, mortgage rates are facing multiple pressures to climb. 

My prediction for rates is that our 30 year conforming rate that has been cozy under 5% for most of the past year will climb above 5.5% by the end of summer and by the end of the year be flirting with 6.00% on a consistent basis.  We will revisit this later in the year to see how accurate I may or may not be.

Rates snap their flat Friday’s trend with an increase across the board following the continued decline in bond markets all week.

Rates for Friday March 19, 2010:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.875%                            Up 0.125%

30 year conforming-jumbo 5.125%                   Up 0.125%

30 year FHA    4.875%                                    Up 0.125%

30 year FHA jumbo 5.00%                              Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Happy 75^th to Dana L. Smith, my Dad!  As I get older I come to realize more and more how thankful I am for the lessons of integrity, honesty, personal responsibility and accountability you taught us.  Being a parent was always first and foremost, I know now how challenging that can be sometimes, but looking at the three adults who are your children I know that there really is no challenging decision: always be the parent!  The best lesson you taught me was how to be a good father, I hope it is the one lesson I am able to pass with flying colors.  I hope to one day thirty years or so hence to be able to look back and see that your granddaughters were instilled with the same values, ethics and morals that guide me, as they have guided you. 

Thanks for all the lessons Dad and Happy Birthday!

Have a great weekend everyone, let me know how I can be of service to you.

Dennis