Non-Qualified Loan

Understanding the Patio Home

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The name sounds deceiving. You’d assume a patio home has a patio, right? That has nothing to do with it. Instead, patio houses are attached homes, similar to a townhouse or condo, but they’re different. They typically only have one story, whereas condos and townhomes have two or more stories.

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Keep reading to learn more about patio homes.

Defining the Patio Home

Patio homes are typically smaller. Not only are they on one story, they have less square footage too. They may or may not have a yard. If they do, it’s a small one. The homes are generally very close together, if not attached. The idea is to save land/space and provide a large number of homes for first-time homebuyers as well as empty nesters.

Most patio homes are part of a homeowner’s association. Many developments have common areas for recreation, increasing the cost of the HOA dues. The HOA typically takes care of the external maintenance on the property too, making it an attractive option for those nearing or in retirement.

What Should you Consider When Buying a Patio Home?

Just like buying any home, you should consider a few factors including:

  • How much are the HOA dues?
  • What does the HOA do/cover?
  • What common areas/recreational activities are included?
  • How large is the lot?
  • How close are your neighbors?
  • What is the layout of the home?
  • What is the size of the home?

Just like buying any other home, you need to be sure the patio home will suit your needs. Just because it costs less doesn’t mean it’s the right answer. Make sure you are comfortable with the closeness to your neighbors or the cost of the HOA dues, for example.

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The Pros and Cons of the Patio Home

All home purchases have pros and cons. The patio home’s pros include:

  • Low maintenance – Typically the HOA handles the exterior maintenance, which decreases the work you must do year-round. This can be good for first-time homebuyers as well as retired homeowners.
  • Low cost – Compared to single-family homes and larger townhomes, patio homes are typically much more affordable (depends on the location)
  • Access to a community – Homeowners of adjoined homes with common areas often have a larger sense of community and togetherness.

Patio homes do have some cons including:

  • Less space – Patio homes are compact. You won’t find large versions as that defeats the purpose of the type of home.
  • Less yard space – Some patio homes have no yard space and those that do have little space available. It’s typically enough for a small slab of concrete or small grassy area in the backyard.
  • Homeowner’s association dues – You’ll usually have HOA dues, which increase the cost of homeownership.

Fortunately, getting a loan for a patio home is the same as getting a home for a single-family home. It’s no more difficult than securing financing on a townhome or condo. If the HOA is in a secure financial position and most of the homeowners are on time with their association dues and not in foreclosure, you should have an easy time securing financing.

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Can a Friend Provide Gift Funds for a Down Payment?

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The down payment is the largest obstacle when buying a home. First-time homebuyers struggle the most, because they don’t have equity in a home to sell. All money they put down comes from their own liquid assets.

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What if you don’t have the liquid assets? Can you get a gift from a friend? Technically the rules state that only family, your employer, or a charitable organization may provide gift funds. There are exceptions to the rule, though.

Proving the Friendship

Accepting money from a friend is different from accepting money from a family member or employer. What if the friend demands repayment? You may end up in a financially difficult situation. Will you default on your mortgage as a result? These are the issues lenders have with friends supplying gift funds.

However, that doesn’t mean you can’t accept gift funds from a friend. You will need to prove the friendship though. Family is easy to prove, whether a blood or marriage relationship. Friendship is a bit harder.

Lenders want to know how long you have known the friend and the depth of your friendship. Lenders want to know the friend is ‘close.’ Just how you prove this will vary by lender.

Proving the Gift Funds

No matter how you prove the friendship, you must prove the gift funds and their origination. You need a gift letter from the donor. Also, the donor must prove the origination of the funds. Just like you would have to do to use your own funds, lenders need to know there isn’t a loan lurking somewhere deep in the trenches here.

Let’s start with the gift letter. The donor must write a simple letter that states the amount of the gift, the reason/address of the property, and the date. The donor must also state that the funds are a gift and not a loan. They must state that no repayment is expected. This one sentence makes or breaks a gift letter.

Next, donors must provide proof of the funds. Are the funds in his/her bank account? The lender may source the funds with their income. If there are large deposits on the donor’s bank statements recently, the lender may ask about them. Basically, the lender needs to know if they are a loan from anywhere else.

If the donor sold a car, stocks, or any other asset, he or she must provide the bill of sale or any other proof of the sale. The lender needs solid proof that the funds aren’t a loan. Any funds the donor can’t prove may not be able to be gifted.

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What is the Maximum Amount you Can Gift?

Lenders typically allow 100% of the down payment to be a gift. Certain loan programs, like the FHA loan for borrowers with credit scores lower than 580 have different rules. The FHA requires the borrower to come up with at least 3.5% of the purchase price for the down payment. The remaining 6.5% may come from gift funds, though.

Aside from lender/loan restrictions, the IRS limits how much one person can gift you too. As of 2019, the IRS allows gifts of up to $15,000 without tax implications. If you receive any more than $15,000 from one person, you and the donor may have to report it at tax time.

Should a Friend Provide Gift Funds?

Before you accept gift funds, think about what it means. You shouldn’t be repaying the money, but how does the friend feel? Will the friend expect equity in the home? Will the friend expect to be on the title of the home? Working out these questions, no matter how difficult they may be to ask, is important.

You may even want to consult with your attorney before accepting gift funds. Make sure everything is on the up and up before you accept anything. Your lender isn’t the only person you have to face – you’ll face your friend for a much longer time in the future. Know his or her expectations before accepting the funds.

Gift funds are a great way to become a homeowner when you don’t have the money for a down payment. Many loan programs allow them, but exercise caution when accepting them. If they are from a friend, work out the fine details to avoid any issues in the future.

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5 Ways to Tell if You Can Afford Your Dream House

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Before buying a home, you need to know how much you can afford. You may have the perfect number in your head, but does the lender agree? Knowing what you can afford before you look at homes saves time and frustration.

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Use the simple steps below to see how much home you can afford.

Know Your Monthly Debts

Chances are you have debts now. They won’t disappear just because you buy a home. Credit cards, installment loans, and student loans are a few examples. Lenders use these payments to calculate your total debt ratio.

Don’t worry, lenders don’t include utility bills, grocery spending, or insurance payments. They only consider the payments on your credit report.

If you notice you have too many debts, consider paying them down now. The fewer monthly debts you have, the easier it is to qualify for a mortgage.

Know Your Gross Monthly Income

Lenders look at your income before taxes. Do you earn an annual salary? Divide it by 12 – that’s your gross monthly income. You need this number to figure out your debt ratios. Lenders have different debt ratio requirements for each program.

If you work hourly or on commission, use your year-end W-2s to figure out your gross monthly income. Divide the annual income by 12. This gives you an average over the course of the year. This is important, especially with variable income.

Know Your Front-End Ratio

Lenders use your gross monthly income to determine an affordable mortgage payment. Each loan program has its own guidelines, for example:

  • Conventional loans – 28% housing ratio
  • FHA loans – 31% housing ratio
  • USDA loans – 29% housing ratio

Once you know your gross monthly income multiply it by the appropriate front-end percentage. For example, if you make $5,000 per month, your maximum mortgage payment on a conventional loan is $1,400 and $1,550 for an FHA loan.

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Use these numbers as a guide. Your total mortgage payment can’t exceed these amounts. Your total mortgage payment includes:

  • Principal
  • Interest
  • Real estate taxes
  • Homeowners insurance
  • Mortgage insurance (if applicable)
  • Calculate your Back-End Ratio

Your back-end or total debt ratio could reduce how much mortgage you can afford. This is where your total monthly debts affect things. Your back-end ratio is the maximum amount of your gross monthly income you can commit to your monthly obligations. This includes the new mortgage.

The back-end ratios are as follows:

  • Conventional loans – 36%
  • FHA loans – 41%
  • USDA loans – 41%
  • VA loans – 41%

Calculate your back-end ratio by adding up the new mortgage payment with your current monthly debts. Next, you should figure out your max total debt ratio. Do this by multiplying your gross monthly income by the appropriate percentage.

Using the $5,000 monthly income, you could have maximum debts of $1,800 for a conventional loan and $2,050 for government loans. If you want a $1,400 conventional mortgage payment, your other debts can’t be more than $400.

Does your income and debts fit this requirement?

Put the Number Into Your Budget

Thus far you have a fictitious number. Sure, it looks good on paper to have a $1,400 mortgage payment, but does it fit into your budget?

If you use a computer program or app to keep track of your budget, toss that $1,400 payment in there. How does your bottom line look? Do you still have money for your ‘other expenses?’ Can you still live the life you’re used to? Do you need to sacrifice? Are you willing to sacrifice?

If you don’t use a program or app, physically take $1,400 out of your bank account. What’s left? Can you cover your other bills? Do you have the cash to do the other things you want to do? Try this for a few months and see how it feels. Practicing before you own the home is a lot less risky than taking a chance on late payments and foreclosed homes.

Knowing how much mortgage you can afford before you shop for a home helps avoid delays. You can shop for a home within your budget. If you have the necessary qualifications for the loan, you’ll have fewer issues getting approved.

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What Home Loans for Teachers With Bad Credit are Available?

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Teachers with bad credit still have many home loan options. While a high credit score speaks volumes, it’s not the only way to get a home loan. Teachers are eligible for the same loan programsborrowers in any other profession can get. In addition, though teachers may be eligible for some ‘special programs’ that make homeownership more affordable.

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FHA Loans are a Good Fit

Oftentimes teachers with bad credit turn to FHA loans. As long as you have at least a 580 credit score and 3.5% to put down on a home, you may qualify. Teachers can get a home with little money down and as much as a 41% total debt ratio.

FHA loans do charge mortgage insurance for the life of the loan, so keep that in mind. You do have the option to refinance at any point, though. Once you improve your credit score, and owe less than 80% of the home’s value, you can refinance into a conventional loan and ditch the insurance.

If you are a teacher with a credit score between 500 and 579, you may still qualify for an FHA loan. However, you’ll need at least a 10% down payment. You’ll also go through what’s called manual underwriting. Rather than a computer underwriting your loan, a person will do it. That person will go through your file with a fine-toothed comb, so to speak.

With a 500 – 579 credit score, you may need compensating factors. These qualifying factors help make up for the risky credit score. A few examples include:

  • Low debt ratio – If you only have a few debts, you leave more money available to make your mortgage payment. This lowers your risk of default, which lenders like to see, especially with a low credit score.
  • High down payment – Even though FHA loans only require a 3.5% down payment, you can make a larger down payment. Investing your own money shows your desire to be a homeowner and make your payments on time. If you don’t, you risk foreclosure and losing your entire investment.
  • Stable employment – Lenders like reliability and consistency. If you change jobs often, they won’t have that feeling of consistency. If you stay at the same job for many years, though, you show lenders that you are reliable, which lowers your risk of default.

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USDA Loans are Good for Rural Areas

The USDA loan is another government-backed program. You must live in a rural area in order to use this program, though. Your total household income also must not exceed 115% of the average income for the area. You can see if you are eligible here.

The USDA does have slightly higher credit score requirements, though. You need a 640 credit score. But, you don’t need a down payment. You can borrow up to 100% of the home’s value. While the credit score requirements are higher, they aren’t as high as conventional lenders require and you could save money without a down payment requirement.

USDA loans are for modest homes. They do charge mortgage insurance, but it’s only 0.35% of the loan amount each year. On a $150,000 loan, you would pay $43 per month in insurance.

Subprime Loans

Finally, you may want to explore your subprime options. These loans come from smaller lenders in your area that keep the loans on their own books. Subprime lenders create their own guidelines and rules. They can accept low credit scores, high debt ratios, and low down payments. Each lender has their own programs, so shop around to find the one that suits you.

Read the fine print when looking at subprime loans. Make sure you know the interest rate, term, closing costs, and any other terms of the loan. Is the rate fixed or is it adjustable? Will you pay points to get the loan? Is there a prepayment penalty?

The Teacher Next Door Program

HUD also offers the Teacher Next Door Program. It’s an extension of the FHA loan, but it comes with great rewards. Teachers and other service-oriented individuals, such as police officers and firefighters are eligible for this program.

HUD designates specific properties in the area that qualify for the program. They are foreclosed homes in an area that could use a positive influence to boost the economy. If you win the ‘lottery’ to buy the home, you only need $100 down on it. You must have FHA financing and agree to live in the home for at least 3 years. If you do, HUD writes off half of the cost of the home after three years.

This means after three years you could sell the home for its value and make a 50% profit or more. Because you only need FHA financing to buy the home, even teachers with bad credit may qualify.

Teachers with bad credit have many options for home loans. The key is to shop around and see what options are available to you. Get offers from at least three lenders to see which lender/loan program will give you the best deal.

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Understanding ITIN Loan Programs

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Foreign nationals often want to set down roots in the United States. Most loan programs require a social security number, which you don’t have. This may make you feel like it’s impossible to get a mortgage, fortunately, there are ways around it. If you have an ITIN, and you meet the loan requirements, you may secure the financing you desire for a mortgage.

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Credit is Important

Before lenders will approve you for a mortgage, they need to see your financial habits. Do you pay your bills on time? Do you overextend your credit? Lenders need these answers.

The only way to get those answers is with a credit history. Without a social security number, though, you won’t have one. Fortunately, many creditors extend credit with just an ITIN.

We recommend starting small. Apply for a secured credit card, which is a credit card with a deposit. The credit card company reports your credit card usage and payments to the credit bureau in exchange for a deposit on your account. The credit card company will give you a credit line equal to the deposit. If you put $100 down, you get a $100 credit line.

As you use your credit and pay your bills on time, you will build up credit. You may want two of these trade lines just to build up your credit. Once you establish yourself for six months or so, apply for an unsecured credit card or personal loan. Keep your loan amount request small, but see if you can get any other type of loan that will help build your credit.

As you continue to pay your bills on time and use your credit responsibly, you’ll obtain a credit score that shows financial responsibility.

Stay Employed

Lenders also put a lot of emphasis on your employment. They want to know that you’ll be at the same job for the foreseeable future. Because you are an ITIN borrower, you already pose a risk of default. Lenders like to see at least a 2-year stable employment history when you don’t have a social security number.

In addition to your work history, you must prove your work ‘future.’ Because you are a foreign national, lenders care about your plans. Will you be here next year? Will you be here in three years? Most lenders require an employment contract that goes through at least the next three years. If you don’t have a contract good for at least three years, it could make it harder to get an ITIN mortgage.

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Make a Large Down Payment

Unfortunately, as an ITIN borrower, you’ll need a larger down payment than borrowers with a social security number. As a general rule, plan on at least a 20% down payment. In some cases, you may need more. Lenders determine the required down payment on the riskiness of your loan.

For example, if you have a low credit score, you will need a larger down payment than someone with a higher credit score. You’ll also need a larger down payment if you have a lot of outstanding debt compared to your gross monthly income.

The down payment helps offset the risk of default. The lender knows that there is at least a little equity in the home. If you stop making your payments, the lender can sell the home for a profit and keep the funds as repayment.

Before you use funds for a down payment, you have to show its origination. In other words, you need a bank account here in the United States. You also need to be able to show regular deposits. It’s best to have your income deposited directly into your account. It’s easy for lenders to source (your paystubs) and it’s consistent. Lenders want the money in the account for at least two months before they will count it for your down payment. This way they know the money didn’t come from another loan as it would show up on your credit report.

Save Monthly Reserves

In addition to your down payment, you need money in a reserve account. Most lenders require six months’ worth of mortgage payments in your savings account or any other liquid account. If your mortgage payment were $1,200, you would need at least $7,200 in a bank account. If you run into financial trouble, the reserves are there to bail you out. Lenders rely on the reserves, so the more money you have on hand, the higher your chances of securing approval.

Have Compensating Factors

Lenders look for any compensating factors that make up for the risk that being an ITIN borrower pose. The compensating factors could be any of the following:

  • High credit score
  • Low debt ratio
  • More than six months of reserves on hand
  • Long work contract

Try to offset the riskiness of being an ITIN borrower by providing as many positive factors as you can. The more reasons a lender has to trust that you won’t default on your loan, the more likely you are to get the mortgage approval.

ITIN loan programs often foreign nationals a way to buy a home in the United States. With good credit, a decent debt ratio, and enough money saved, you should be able to get the loan you need to buy a home.

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How to Get a Mortgage After Chapter 7 Discharge

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You’ve likely heard that a bankruptcy sits on your credit report for up to seven years. While that’s true, it doesn’t affect your ability to get a mortgage that entire time. In many cases, you can get a mortgage in as few as two years after a Chapter 7 discharge.

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Just how do you do it? Keep reading to learn the steps you should take.

Build Your Credit Again

First, you need to build your credit up again. A Chapter 7 bankruptcy wipes the slate clean. While that is great for your finances, it’s not great for when you apply for another loan. You need a credit history – a positive credit history.

Right after the Chapter 7 discharge, start building your credit. It sounds odd, why would you take on new debts after getting out of debt, but it’s important. Don’t jump in headfirst and drown in debt again. Instead, take it slow.

Start with a secured credit card. You may only get a credit line of a couple hundred dollars, that’s okay. Take it and use it. Don’t keep a balance, though. Pay the credit card every month. Charge expenses you normally pay anyway. Show lenders that you are financially responsible even after filing bankruptcy.

Once you have a secured credit card, apply for an unsecured credit card or personal loan. Get as much good credit going as you can. You want a decent mix of installment debt and revolving debt with good payment histories. This will show lenders that you can manage your finances again.

Get a Good Rental History

Lenders need to see that you can handle a housing payment even after the BK. If you rent, make sure you make your payments on time. Also, have proof of the payments. If you rent from family or friends, keep canceled checks. If you rent from a rental company, have them complete a Verification of Rent form for you. If it shows that you made on-time payments, it will help lenders make a solid decision on your mortgage.

Fix the Problem

While you build up your credit, think about why you filed for bankruptcy. Did you lose your job, fall ill, or just get carried away with your spending? Lenders are going to ask what happened. They aren’t nosy. They want to know what led to the downfall to see if it’s something that could happen again.

If you want to show lenders that you are responsible, show that you’ve overcome the problem that caused the bankruptcy. If you lost your job, the obvious solution is to have another job. Show lenders that you’ve been at the job for at least 12 – 24 months and that you can succeed at it. If you fell ill and got behind, show lenders that you were able to pick up the pieces and get current again.

You may need to put your reasons and solutions in writing. Have as much evidence as you can to help lenders make a solid decision. They want to know that you’ve fully overcome the issue that caused the bankruptcy.

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Apply for a Government-Backed Loan

Your best bet, especially if it’s only been two years since your bankruptcy discharge is to get a government-backed loan. Most borrowers take out an FHA loan. You only need a 3.5% down payment, a 580 credit score and only have to wait two years after your BK discharge. The flexible underwriting guidelines make this loan a great option.

If you are a veteran of the military, you may be able to use your VA home loan benefits. If you didn’t use them before or you were able to keep your home through the BK, you may still have your VA benefit left. If you have enough of a VA benefit to cover the price of the home (up to $484,350), you won’t need a down payment on it. VA loans, like FHA loans, only require you to wait two years after your bankruptcy discharge to get a VA loan.

Shop Around

If you don’t qualify for an FHA loan, shop around with subprime lenders. Don’t let the name scare you. These lenders offer alternative loans that they keep on their own books. This gives them the flexibility of writing their own guidelines. You may find subprime lenders that have lower credit score guidelines or that will overlook your BK. They often make it easier to qualify for a mortgage after a BK.

Even if you qualify for an FHA or VA loan, shop around. Each lender sets its own guidelines and charges its own rates and fees. Because you have a BK in your recent history, lenders will probably charge more money for your loan. Shop around until you find the most affordable option to help you avoid any future financial issues.

Getting a mortgage after a Chapter 7 discharge isn’t as hard as it seems. You just need to put in the legwork and the try to fix as many credit/financial issues as possible before applying. The more positive factors you can show a lender, the more likely it is that you’ll get approved.

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What is a Single Family Home? And Why Should you Care?

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When you look for a home, you will come across many different types of properties. Knowing what is available and what you want will help narrow down your options. The most popular type of real estate is the single family home. What is it and how does it affect your ownership?

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Keep reading to find out more.

The Definition

A single family home is a home on its own lot or parcel of land, it does not share land with other properties. SFHs do not share walls or roofing with other homes. It is its own detached property. Single family homes also have private street access (no lobby or shared parking lot) and its own utilities.

Other characteristics of single family homes include:

  • Attached or detached garages
  • Small or large yards depending on the size of the lot
  • Single kitchen

The Reasons to Consider a Single Family Home

Single family homes have many benefits, most of which is privacy. Since you don’t share walls or property with others, you have more privacy than you would in an attached home. Typically, you have neighbors, sometimes rather close neighbors and sometimes neighbors with quite a distance, but they either way, the neighbors are much further away than those in an apartment, condominium, or duplex.

Other benefits of single family homes include:

  • Freedom to do what you want with the home
  • More room to store items rather than feeling crammed
  • The ability to work outdoors, which can be good if you love gardening and yard work

It is often easier to get mortgage financing on a single family property than it is any other type of property, including condominiums. Mortgage lenders prefer single family properties for the lower risk of default. When you share the property with other owners, such as is the case with a condominium, the lender is dependent on all owners making their payments in order to avoid foreclosure. If even a few owners lose their unit to foreclosure, it can bring the values of all units down, putting all lenders at risk of default.

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Reasons to Consider Something Other Than a Single Family Home

Single family home living isn’t for everyone. It does have its downsides including:

  • There may be a homeowner’s association that limits your ‘freedom’
  • You must shoulder all maintenance and repairs as well as the costs
  • You are solely responsible for the property taxes

If you aren’t ready to take on the hard work and financial responsibility of a single family home, condominium or townhome living may be a better option for now. When you own just a unit, but not the land, the homeowner’s association manages the maintenance and repairs on the property, taking the financial and physical burden off you.

A single family home is a great option when you are ready to take on the work and financial responsibility of it. You will likely get a mortgage much easier and have more freedom in what you can do with the property. If you aren’t ready, thought, there are several other options available to you.

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What are the Pros and Cons of a Mortgage Recast?

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Most people know about the mortgage refinance options they have, but are you aware of the possibility of a mortgage recast?

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A mortgage recast re-amortizes your existing principal balance, potentially lowering the amount of interest you pay for the loan. Unlike the mortgage refinance, you keep the same loan and terms, the only difference is the principal balance.

In order to use a mortgage recast, you must significantly pay down your principal balance. You can do this with one lump sum payment or through the years with extra principal payments. The lender takes the new principal balance and ‘recasts’ it over the remaining term with the same interest rate you had.

Keep reading to learn the pros and cons of this process.

The Pros of a Mortgage Recast

You Won’t Pay Closing Costs

Recasting your mortgage doesn’t require the lender to underwrite your loan. The lender doesn’t even have to do any major work on it. Instead, the lender takes the current principal balance and recasts it over the remaining term. You use the same lender that you have currently. It’s worth asking if the lender charges fees for this service, but they won’t be anywhere near as high as the closing fees on a refinance.

You Won’t Have to Qualify

If you refinance your mortgage, you must go through the qualification process all over again. This includes checking your credit, debts, income, assets, and loan-to-value ratio. You may or may not qualify to refinance your loan.

If you recast your mortgage, you don’t have to go through any of this. You keep the loan with the same lender that qualified you for it in the first place. Recasting your mortgage gives you a lower mortgage payment, so there’s not much risk for the lender when recasting your mortgage. In fact, the lender comes out ahead if you paid a big chunk of the principal balance off already.

You Pay Less Interest

The largest benefit of the mortgage recast is the lower amount of interest you’ll pay. Recasting your mortgage lowers the principal balance that the lender figures the interest payments on. With the lower balance, you pay less interest each month as well as over the life of the loan. It’s different from just paying down your principal balance ahead of schedule. With a mortgage recast, the lender actually reduces your payments, minimizing how much interest you pay over the life of the loan.

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The Cons of Mortgage Recast

You Keep the Same Term

Recasting your mortgage doesn’t lower the loan’s term. It uses up the term you have left. In other words, you won’t pay your mortgage off any faster. If you pay the minimum required payments, you will still pay the mortgage over the entire initial term. Of course, you have the option to make extra payments and pay the loan off early, but your amortized payments will pay your loan off in the original term.

You Need a Large Sum of Money

In order to qualify for a mortgage recast, you must be able to significantly pay down the mortgage balance. Each lender has different requirements regarding how much you must pay down. Some lenders require a lump sum payment, such as $10,000 or $20,000 while others allow incremental payments throughout the years towards the loan’s principal.

You Give up Your Liquidity

Once you pay the large sum of money upfront to pay the balance down, you lose the money’s liquidity. Once tied up in your home, you can’t get access to the funds unless you refinance the home with a cash-out refinance. While a cash-out refinance may be available, it will cost you money and could extend your loans’ term, depending on what you can afford.

A mortgage recast can offer many benefits if you are trying to limit the amount of interest you pay. Before you recast your mortgage, though, look at all of your options. Do you have an emergency fund that can cover expenses should your income stop? If not, putting your money into your home to get a mortgage recast may not be the best option. On the other hand, if you are financially secure and just want to limit how much your mortgage costs in the end, talk to your lender about the possibility of a mortgage recast.

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The Best Mortgage for Self-Employed Borrowers

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Today’s economy requires many people to turn to self-employment to make a living. The unfortunate part of this, however, is that it becomes harder to obtain a mortgage when your income fluctuates so much. Self-employed borrowers typically have fluctuating income that makes it hard to pinpoint just how much they make. In addition, many self-employed borrowers write off a large number of expenses on their income taxes, making it look like they do not make nearly as much money as they really make. Because mortgage lenders are required to use the amount of money you make as reported on your tax returns, it becomes very difficult to qualify for a mortgage.

Applying for a Conventional Loan

If you have good credit and think your debt ratio is close enough to qualify for a conventional loan, you can apply for this type of loan. In order to qualify, however, you will have to provide full documentation which includes:

  • Last two years’ tax returns with all schedules
  • Business license
  • Bank statements
  • Current Profit & Loss statement

If the tax returns do not report income high enough to get your debt ratio down, you can do one of two things: apply for a different type of loan or wait a year or two and file your taxes with fewer write-offs in the future. Typically, potential borrowers choose to apply for a different type of loan.

A Great Alternative

Since most self-employed borrowers will not qualify for a conventional loan, there is a great alternative that makes it easy to qualify for a loan. This alternative is the Bank Statement Loan. This loan is as close to a subprime loan as a borrower can get today. As the name suggests, the lender uses your bank statements to verify your income rather than any paystubs or tax returns. The benefit to this method is that the lender can see the gross amount of money you put into your bank account every week or month, depending on how you get paid. In this case, your expenses are not taken into consideration as of yet – your total gross income is able to be used.

How the Income Gets Verified

Because bank statements have the potential of being forged, there are certain precautions lenders need to take with this type of loan. When you use tax returns to qualify for a loan, the lender can verify the amounts you provide them with the IRS through an activated IRS Form 4506 which allows the lender access to your tax transcripts directly from the IRS. Because bank statements do not have that type of verification, the lender must verify other things, such as:

  • Your self-employment and income from your CPA – The CPA can provide a letter of verification on his letterhead to verify your employment and income status
  • The presence of a business license to show that your business is legitimate
  • A bank’s stamp and date to verify that the account statements are real

Using the Right Account

You have to choose the right account to use to verify your income when you use a bank statement loan. You are unable to use both a business and personal account – you have to choose one or the other. If you do need to use both in order to qualify for the loan, it will be necessary to determine the difference between the two as the lender needs to make sure you are not “double dipping” or using business income in your business account and then again in your personal account.

How to Handle Cash Deposits When Applying for a Mortgage

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When you apply for a mortgage, your lender will look at your bank statements very carefully. They aren’t looking at where you spend your money, though, instead, they look at your deposits. They need a paper trail of every deposit so that they know its origination. If you have cash deposits, it could pose a problem with your mortgage application.

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Keep reading to learn how to get around this issue.

You Need Proof of the Funds’ Origination

If you have cash to deposit in your checking or savings account, you can do it, but you need proof of its origination. Let’s say for example that you have $1,000 in cash that you received from selling some antiques your grandmother gave you.

You could just go and deposit the money and think nothing of it. But if it is within two months of a mortgage application, the lender will question it. If you don’t have proof of where you got the funds, the lender will not be able to include the $1,000 in your available funds and they may even deny your loan.

On the other hand, if you had a Bill of Sale or receipt to show the lender that you sold the items, it could serve as your proof. The lender will compare the receipt to the deposit amount – make sure the amounts match perfectly in order for the lender to accept this form of proof.

The same method works for any type of cash accumulation, whether you sell stocks, sell a car, get a bonus from work, or get a gift from a family member. You need proof of the receipt of cash.

Gift Funds are a Little Different

If you do receive gift funds from a family member, you have a few more steps to take. The lender needs to know where the funds originated, but also that the donor does not expect you to repay the funds. In other words, the lender needs to know that you don’t have a loan somewhere down the line.

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You can prove gift funds with a few documents:

  • Gift letter – You need a gift letter from the donor stating that the funds are a gift, the amount of the gift, and the reason for it (purchasing a home). The letter should also state that the funds are a gift and there is no expectation of repayment.
  • Proof of the funds – The donor must provide his or her own bank statement showing ownership of the funds. Just like with you, the borrower, the bank statement shouldn’t show any recent large cash deposits. The lender needs to know that the funds the donor provides are his own funds.
  • Proof of transfer of the funds – The donor must write you a check, which you must keep a copy of to show the lender. You then deposit the check in your account, taking a deposit receipt as proof of the deposit, again, giving it to your lender.

Make Deposits Earlier Than 2 Months Before You Apply

One last method you can use if you need to make cash deposits in your account is to do so before you apply for the loan. Lenders typically only ask for bank statements from the last two months. If you do not have any large deposits within that time, you should be able to use the funds in there for your down payment and closing costs.

Lenders only look for recent large deposits. If you took out a loan more than two months ago, it would show up on your credit report and the lender would know about it already. It’s the loans that are new that don’t show up right away and could put the lender in a bind if they don’t catch it.

It’s wise to avoid any cash deposits when you want to apply for a mortgage in the near future, but sometimes it is just necessary. As long as you are upfront with your lender and tell them what the funds are from and you can document it, you should be in good shape. It is always wise to be honest with your lender as they can walk you through the program and take the steps necessary to get you approved.

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