Non-Qualified Loan

The Top Reasons Underwriters Need a Letter of Explanation

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The mortgage process can feel like a serious of questions that never ends, but it’s for good reason. Lenders need to make sure you can afford the loan beyond a reasonable doubt. The last thing you or the bank wants is a foreclosure.

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After you provide documentation for your income, assets, and liabilities, expect to answer questions about certain areas of your life, most notably your bank account, credit and job history. Sometimes lenders ask questions about these factors that require a Letter of Explanation. All an LOX does is put into writing the reasons for your current situation that may need a little more explanation.

So why do lenders ask for a Letter of Explanation? Check out the top reasons below.

You Change Jobs Often

Lenders want a consistent job history. While a 2-year history is recommended, if you changed jobs within the last two years it doesn’t automatically mean you won’t get approved. When lenders get the most concerned is when you changed jobs frequently within the last two years or if you completely changed careers within that time.

Let’s look at an example. You used to be a teacher but decided to get trained as a real estate agent last year. Those are two completely different career paths and since your real estate career is rather new, a lender may worry that you won’t succeed. You may need to write a Letter of Explanation stating your reasons for changing careers as well as what training you underwent so that you succeed in your new career.

If you didn’t change careers, but change jobs often to the point that a lender considers it ‘job-hopping, they may want an explanation for your actions. In other words, they want to know why you keep leaving your job (is it forced or voluntary) and what you benefit from leaving and starting a new job.

Lenders use these answers to decide if you are a good risk for a loan or if you are a high risk of default.

You Have Large Deposits

If you make large deposits in your bank account within two months of applying for a loan, you’ll have to explain it. If a lender can’t tie the deposit in with your employment income, they’ll need concrete proof of its origination.

Along with the paperwork proving the funds’ origination, lenders will want a Letter of Explanation. The LOX should state where you obtained the funds and why. If you don’t have proof of your explanation, a lender may not be able to accept the deposit as a part of your funds. For example, if you claim you sold your car and received cash for it, but you don’t have a Bill of Sale and/or a canceled check from the buyer, the lender may not be able to use the funds for qualifying purposes.

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Late Payments

Lenders look closely at your credit score and credit history. Your credit history actually tells them a lot more about your financial responsibilities. If upon looking at your history they see many late payments or collections, they may want an explanation.

For example, some people fall onto hard times and make several payments late within a short period. This may be easily explained with a Letter of Explanation. For example, if you fell ill and were in the hospital, it would make sense why you were unable to pay your bills on time for that short period. An LOX could explain the situation and if you could provide proof of your downfall as well as how you picked up the pieces, it would help your situation.

Lenders need to know that late payments aren’t a typical habit and that this was a one-time occurrence, which you can prove with your LOX.

Change in Income

If you’ve had a change in income recently, and it wasn’t a raise, you’ll need to explain the situation in a letter. All lenders see is a drop in income, which makes them want to decline your loan. But, if you have a valid reason, such as you started a new career or started at a new company that has more opportunities for advancement, an underwriter may see the value in it and approve your loan. Without the letter, the lender would see you as a high risk of default and decline the loan.

A good Letter of Explanation can be the difference between loan approval and loan denial. Stay in close contact with your loan officer to find out what questions the underwriter may have on your loan so that you can clear up any miscommunication right away and keep your mortgage approval.

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How Does an Asset-Based Mortgage Work?

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Did you know that you don’t have to have an income to qualify for a mortgage? As shocking as that sounds, it’s true. There’s a trick though. You have to be able to prove that you have enough assets to cover the mortgage payment for the next 30 years.

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The asset-based mortgage can help retirees or those just living off their assets to get a mortgage. Maybe you don’t want to exhaust all of your assets at once. If you don’t mind paying interest on the loan, you may be able to secure a mortgage even without verifying that you work.

What Type of Assets Can you Use?

You can use almost any type of liquid asset that you have available. In other words, you can’t use other pieces of real estate or a vehicle as an asset. But you can use things like your checking, savings, CDs, money markets, stocks, bonds, mutual funds, and even retirement accounts.

You should know, though, that you can only use 100% off any cash you have on hand. This includes any checking or savings accounts. Any assets tied up in an investment will be taken at 70% of the current value. This allows the lender to account for any taxes and/or fees you may pay for using the funds.

Does Age Matter?

Your age may matter when applying for an asset-based mortgage. There are two reasons for this – retirement age and the length you will hold the loan.

As far as retirement goes, lenders care about your age so that you don’t deplete your retirement savings before you are even of retirement age. If you apply for an asset-based mortgage using your 401K or IRA and you are over the age of 65, a lender may be willing to count those funds. Again, they will only use 70% of the value to qualify it as income, though.

If you are far from retirement age, a lender may not be willing to count your retirement funds as income. If you are too far from retirement, it can be risky to let you use those funds to pay your mortgage. What does that leave you with when you retire?

Finally, your age matters to help determine the length of the loan. Generally, lenders use 360 months to determine your income. In other words, they divide your total assets by 360 to come up with your monthly income. If you are over the age of say 75, the lender may divide your income over 120 months rather than 360 months. Anyone younger than 75 years old, though, will likely have their assets divvied up over 30 years, though.

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What Will Lenders Use to Qualify?

Once you have the total amount of your assets based on the 70% formula with the exception of cash, checking, or savings accounts, you divide that number by 360. See the example:

You have $1,500,000 in assets. $300,000 of it is in cash, the remainder is in stocks, bonds, and IRAs. You are 45-years old. Lenders will do the following:

$1,500,000 – $300,000 = $1,200,000

$1,200,000 x .70 = $840,000

$840,000 + $300,000 = $1,140,000

$1,140,000/360 = $3,167 monthly income

The lender will use this figure to determine how much you can afford each month, just as they would if you made money from employment.

Qualifying for the Loan

Once you know your monthly income, the rest of the qualification process works much the same as any other loan. You must meet the credit score and debt ratio requirements of each loan program. The lender needs to make sure that you can afford the loan beyond a reasonable doubt. They will do so by verifying all aspects of your loan including taking a long, hard look at your credit history.

The question you need to ask yourself is if the asset-based mortgage makes sense. Many people know this mortgage as an asset depletion mortgage. As the name suggests, you deplete your assets. You need to make sure this is a smart choice for you not only now, but well into the future. What will the future hold? How will you pay for your expenses moving forward? Are you retired for life or will you seek employment again sometime in the future?

These are things you must consider when determining if the asset-based mortgage makes sense. Talk with lenders to see what options are available to you and make sure you can comfortably afford the loan before making any decisions.

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Does a Garage Add Home Value?

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You may not think of your garage as adding value to your home since it’s not living space, but it can help. Adding a garage adds storage space, which is of high value to many buyers. Where your home is located and the type of garage you add will determine how much value it adds to your home, but know that you’ll see some type of return on your investment.

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Why Garages Matter

You still may be wondering why a garage would add value. Let’s look at it from the buyer’s point of view. Garages can:

  • Provide storage space for your vehicle
  • Provide storage space for items you don’t need on a regular basis
  • Great place to conduct hobbies, like woodworking or mechanics
  • Serve as a ‘man cave’

The uses for the garage are literally endless. There isn’t a specific use you must use it for in order for it to affect your home’s value. Just having a garage will help increase it.

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The Type of Garage Matters

There are two types of garages you can choose – attached or detached. Typically, attached garages provide the most value. This is mostly for convenience purposes. Detached garages are harder to access, especially in areas of bad weather, but that’s not to say that they won’t add any value to your home, because they do.

Believe it or not, attached garages cost less to construct. If your property isn’t set up to accept an attached garage, however, a detached garage can add value. This is especially true if detached garages are the ‘norm’ for the area.

The Style Matters

Even though it may be tempting to construct a garage that looks nothing like your own, but suits your personal preference, you may not see the increase in value that you desire. Homebuyers love a uniform look. Choosing to make the garage look just like the rest of the home will keep your neighbors happy and your home value up.

How Much Do Garages Increase a Home’s Value?

How much of a return on your investment you’ll see when adding a garage depends on the area. Do you live in an area where parking is a hot commodity? Maybe it’s hard to find street parking in your neighborhood. If that’s the case, a garage will add incredible value. If you live in an area where garages aren’t the ‘norm,’ though, you may not see as large of an improvement in the home’s value.

If you already have a garage, but it’s in less than optimal condition, renovating it can greatly increase your home’s value. A large part of your home’s value has to do with its curb appeal. Since the garage is one of the first things people see on your home, an ill-fitting garage could really hamper your home’s value.

On average, homeowners see between a 75% and 80% return on their investment when adding or renovating a garage. Before you decide to do so, talk with a local appraiser to see how a garage will affect your home’s value. If you won’t see that much of an improvement, you may want to find other ways to fix up your home to improve its value.

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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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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 Guide to Mortgage Loans for Physicians

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Buying a home may seem impossible when you have piles of student loans staring you in the face. Even with a doctor’s salary, covering the cost of the student loans plus a mortgage is a lot. Luckily, lenders have mortgage loans for physicians to help you address this situation.

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Keep reading to learn more about mortgage loans for physicians.

What are Physician Mortgage Loans?

Physician mortgage loans, or loans specifically for doctors, have special terms that only apply to doctors. In other words, anyone in a different profession cannot secure this type of loan. Doctor mortgage loans come from alternative lenders or portfolio lenders. You won’t find them at your big name banks that offer only Fannie Mae, Freddie Mac, FHA, VA, and USDA loans. Instead, you’ll find them at smaller lenders that keep the loans they write on their own books.

Physician mortgage loans can have many different faces. It depends on the lender and your needs. Some lenders can tailor a loan to meet your needs. For example, some lenders require a small down payment of 5% to 10%, while other lenders allow 100% loan-to-value loans (no down payment).

Figure out what you need and then tell that to lenders when you shop around. If you know you don’t have the reserves to put down on a home just yet, be upfront with lenders. Let them know that you need a 100% LTV loan. This will help them figure out the right terms for the loan. Don’t assume a lender will say ‘no;’ you have to ask.

Qualifying for Mortgage Loans for Physicians

Because mortgage loans for physicians come from many different lenders, we don’t have a definitive guide of how to qualify. Instead, we know what lenders look for in general, but make sure to ask your lender about the specific details it requires.

The general guidelines include:

  • Good credit score – A credit score over 700 is best, but some lenders may allow a credit score as low as 680 if you look around.
  • Good debt ratio – Your debt-to-income ratio (not including student loans) should be less than 45%. This means your current debts should take up less than 45% of your gross monthly income.
  • Proof of deferred student loans – If you pay your student loans currently, the payments become a part of your debt ratio. The physician mortgage loan program doesn’t include deferred student loan payments in the DTI, though, which can help you get approved.
  • Have a medical degree – You must have graduated medical school and have a degree in order to qualify for most doctor loan programs.
  • Proof of a job – You must provide proof that you have a job. If you aren’t working as a doctor yet, you’ll need proof that you will start working within the next 60-90 days.

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Why Lenders Offer Physician Loans

It may seem odd that lenders would go out their way to help doctors that already have more loans than they can handle, but they have good reason. Most doctors make a great living eventually. When they first start out in their career, the income may be less than optimal and when you combine that with a lot of student loans, it can seem unbearable. But fast forward a year or two and most doctors can successfully pay their loans down, stay on top of their mortgage payments, and have plenty of disposable income, which is why lenders give doctors this special treatment.

In generals, doctors don’t pose a high risk of default. Thanks to a high-paying career, doctors can keep up with their payments and even pay their loans off early in some cases. Lenders worry much more about borrowers in other professions that don’t have high job security or the ability to advance as doctors do.

Should you Consider a Physician Loan?

Not every doctor should get a physician loan, as crazy as that sounds. You should think of your future and where you see yourself first, especially if you opt for a 100% loan. Here’s why.

Borrowing 100% of the purchase price of a home means that you have no equity in the home. If you move in the next two to three years, you still won’t have much equity as it takes several years to pay your principal down to a point that you actually have decent equity. If you move within the next couple of years, you won’t have money to put down on the next home, at least from the equity of your current home. Unless you have money saved up from your increased income, you may find yourself in the same boat in your next home.

If you plan to stay put in the home, though, the physician loan may help. Sure, it takes a while to build up equity, but if you are in the home for the next 20 to 30 years, it won’t matter to you. Of course, you have other options aside from just a 0% down payment loan – you just have to ask lenders what options they can provide you.

Choosing a physician loan is a personal decision. It’s definitely an attractive option for doctors who have a large amount of student loans that don’t see themselves becoming a homeowner within the next few years. As is the case with any loan, make sure you understand the loan’s terms well. Ask the lender about the rates, fees, and terms. Think of your future as well, so that you know what to expect when you sell and need the equity for a down payment.

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Should You Build a New Home?

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If you are in the market to buy a home, chances are that you thought about whether you should buy an existing home or build a new one. You aren’t alone. Most buyers go back and forth on this decision. While building a new home seems like the ‘best’ way to do it, there are pros and cons you should consider before making your decision.

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The Pros of Building a Home

There’s nothing like building a new home. Walking in and knowing that everything is brand new and built just for you is a feeling you can’t replicate. But, there are other benefits too:

  • Customization – Unless you buy a spec home, you can typically choose all of the features of the new home. You’ll choose things like the type of flooring, cabinetry, and trim. You’ll even choose the colors of the countertops, carpentry, and door handles. You’ll make so many decisions that you’ll probably want to avoid decision making for a while afterward.
  • Energy efficiency – Building a new home means using today’s latest technology. This often means more efficient insulation, HVAC systems, windows, and doors. According to the EIA, new homes are 30% larger than old homes, yet only use 2% more energy.
  • Less maintenance – New homes often come with a warranty for up to 10 years. If there’s a defect or something breaks down within that time, you may get it fixed for nothing. This will vary by warranty, though. Even without the warranty, everything in the home is new and should last without needing repairs or maintenance for at least a few years.

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The Cons of Building a New Home

The new home smell only lasts for so long and then reality occurs. Knowing the downsides of building a home can help you make the right decision. The downsides include:

  • Longer time to move in – According to the Census Bureau, it takes 7.5 months to build a home. If you were to buy an existing home, you may be able to move in as little as 30 days. If you have a home to sell or your lease is up on your rental, you may have to find somewhere to live in the meantime.
  • Little room for negotiation – Home builders typically don’t negotiate the sales price of the home. You may have some wiggle room on negotiating upgrades or other incentives, but the actual price of the home will likely remain the same.
  • Everything costs money – That beautiful model you walked into and fell in love with isn’t what you’ll get with the base price of the house. Ask the representative what’s included in the base price and you may be unpleasantly surprised. Each upgrade adds to the price of the home, which can make it harder to get a mortgage.

Keep in mind too, that just because a home is new doesn’t mean it’s perfect. Humans build it and they can make errors. Things can go wrong or they could just get lazy. We highly recommend that you still pay for a home inspection if you decide to build a new home. The inspector can make sure that everything is built to last and identify any problems up front.

What Can You Afford?

Putting the pros and cons aside, it really comes down to what you can afford. Know how much mortgage you qualify to receive. Then compare that to the prices of the homes in the area. Again, because all upgrades are extra on a new home, you need to know what you can afford. You may find out that after putting all of the options on the new home that you want that it’s out of your price range.

Comparing the cost of new homes to existing homes in the area will give you a ballpark idea of where you stand. If the new homes are completely outside of what you pre-qualify for on a mortgage, you may want to stick to the pre-existing homes. If the prices are about the same or the new home prices are less than what you qualify for, then it’s up to your personal preference.

Choosing a new home or an existing home is a big decision. Look at the big picture and remember that this is one of the largest investments you’ll make in your lifetime. Think of your goals for the home and how long you plan to live there. Combine that with the amount of mortgage you can afford and you should be able to make a solid decision.

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Understanding How Often You Can Refinance Your Home

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Once you have a mortgage, you aren’t stuck with it forever. If a better rate comes along or you want to tap into your home’s equity, you may be able to refinance. Just how often can you refinance? It depends on the situation.

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Technically, you can refinance as much as you want. The real question is whether or not it makes sense to do so. You may also have to meet certain lender requirements in order to refinance often, such as seasoning requirements.

We’ll discuss each of these factors below.

How Long Should you Wait to Refinance?

Just how long you should wait to refinance depends on the mortgage program. Some mortgage programs, especially cash-out mortgages, require you to have six months of seasoning. In other words, you must have your current mortgage for at least six months before you can refinance. This isn’t the case for every refinance, though.

If the mortgage program doesn’t require a specific seasoning period, you should determine what makes sense for you. Keep in mind that each time you refinance that you pay closing costs. You also restart your loan’s term. If you keep refinancing, you’ll never get ahead on your term, continually extending how long it takes you to own your home free and clear.

Is it Bad to Refinance Your Home Multiple Times?

As we stated above, you will pay closing costs every time you refinance your mortgage. The closing costs can be as much as 5% of your loan amount. On a $100,000 loan, this means $5,000. If you refinance multiple times, you pay the closing costs repeatedly. This can take away from the benefit of refinancing.

You also have to think about the loan’s term. When you refinance, do you take the same term or do you shorten it? For example, if you currently have a 30-year term that you’ve made payments on for five years and then you refinance it into another 30-year term, you just erased those five years. It will not take you another 30 years to pay off your mortgage. If you keep doing this, it could be hard to ever own your home free and clear.

Does this mean that it’s wrong to refinance your home multiple times? It doesn’t. There are reasons that homeowners find to refinance more than once. For example, if you refinance one time to take cash out of your home’s equity and then you refinance again in the near future to lower the loan’s interest rate, you benefit from the refinance.

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What is a Break-Even Point?

When you think about refinancing, you should know your break-even point. This is the point that you will make up for the closing costs. Let’s say, for example, that your closing costs are $7,000. Let’s also say that you’ll save $100 a month by refinancing. Your break-even point would be:

$7,000/$100 = 70 months

Your break-even point is the total amount of your closing costs divided by the monthly savings. In this case, it would take 70 months to recoup the closing costs. If you won’t be in the home longer than 70 months, it may not make sense to refinance.

Is it Worth it to Refinance?

Now that you know what it costs to refinance and that you may reset your loan’s term, is it really worth it to refinance?

Just because you can refinance doesn’t mean it makes sense to do so. Even if you will save money each month, it may not benefit you in the long run. You have to look at the big picture. We already discussed looking at the break-even point, but you have to look at the bottom line too.

How much will the new loan cost you over the entire term? Will you save money in the end? If you add years to your term, how much interest will that cost you? Just because you save money each month, it doesn’t mean that you’ll save money in the long run.

The truth of the matter is that you can refinance as much as you want, but it probably doesn’t make sense to do so. If you refinance once or twice, that is more than enough. At some point, you should keep your mortgage and focus on paying it off completely. Of course, there are always exceptions to the rule and reasons that you need to refinance multiple times, but in general, it makes sense to focus on paying off your mortgage rather than continually refinancing it.

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How to Manage your Debt Ratio to Obtain Bank Statement Loans

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Are you recently self-employed? Maybe it occurred as a result of the economic disaster that occurred after the housing crisis of 2007. Whatever the case may be, if you own your own business and are making a good living, you are back on the track to good things. What if you obtained your mortgage right before the housing bust and took an adjustable rate mortgage that is about to adjust now and you need to refinance? Your situation is completely different, going from someone’s employee to self-employed. In the eyes of the bank, this is a riskier move, but that does not mean it is impossible to refinance. There are many lenders out there willing to help you out, but you should do these three things first to make sure you are good and ready.

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Make your Business Legitimate

Your business might seem legitimate in your eyes, but in the eyes of the banks, it is not until you do a few things:

  • Have a licensed CPA prepare your taxes right from the start, if you can. If you have already been in business for a while, get a licensed CPA right away. This ensures that a non-interested third party handles your income and can vouch for the validity of it.
  • Have a business license with your name on it. It is not enough to hang a shingle outside and call yourself a business. You have to be a legally recognized business, which is done by registering your business and receiving a license to prove it.
  • If you do not have a business license or your business does not need one, be prepared to have your CPA write a letter on his letterhead stating that you have been in business for the last 2 years or longer and that he has been handling your taxes for that period of time.

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Have High Credit Scores

This could be the hardest step when trying to refinance as a self-employed borrower. Your credit scores probably took a hit as you started your business. With extensive credit being granted, applications being filled out, and money flying around, your credit score is likely to be all over the place. Generally, lenders want self-employed borrowers to have a credit score over 700. There are simple ways to get this going on your end if you are not there right now:

  • Minimize your utilization rate, which means try to pay down as much of your debt as possible. Using more than 30 percent of your available credit gives your credit rating a good beating.
  • Make your payments on time all of the time, especially any housing or installment payments.
  • Take care of any collections or judgements reporting on your credit report, whether you have to pay them off or just straighten them out, getting them removed from your credit report if they were already satisfied.

Save Money

Money talks in the mortgage industry. The more liquid money you have available and can prove to a lender, the less risky you become. Being self-employed adds a layer of risk to your mortgage application because you do not have steady income, like you would have if you were a salaried employee. Because of this, lenders need factors that will make you less risky – or factors that will help you continue to make your mortgage payments should your business suddenly begin to falter. Liquid assets, meaning money that is not tied up in any type of investment or collateral can serve as a compensating factor, lowering the risk your self-employment brings. If you do not have adequate savings yet, start saving now and wait to refinance until you have several months to one full year’s worth of reserves on hand.

Lenders want to see that the self-employed have their ducks in a row, so to speak. They want to know that you are not a high risk and that you can continue to pay your mortgage no matter what is going on in your business world. When you have a third-party to vouch for you; have high credit scores; and have plenty of reserves, there are many options for a self-employed mortgage out there for you. Whether you get a stated income loan, bank statement loan, or qualify for a conventional loan with your last two years’ tax returns, there are many alternatives out there – start getting yourself ready today so you can apply!

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3 Things the Self-Employed Need to do in Order to Refinance

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The dreaded debt ratio holds many borrowers back from obtaining a mortgage, especially those that are self-employed. Because your income is not as straightforward as someone with a consistent salary and W-2 to prove it, you have to be more creative with your monthly debts in order to get your debt ratio down. The typical maximum for a Qualified Mortgage is 43 percent, but you have to have other factors that fall into line, such as predictable income in order to qualify under those guidelines. Lenders that are willing to offer alternative documentation loans, such as bank statement loans, are able to be a little more flexible with the debt ratio, but they still want it as low as possible. Here are a few simple ways to ensure your DTI is not out of control in order for you to get approved for a more unique loan program.

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Refinance your Debts

You can have outstanding debt and still get a mortgage. What lenders care about most is the monthly payments you must make. If your current payments take up a large portion of your monthly income as they figure it based on your last 12 to 24 months’ worth of bank statements, then you may have a harder time qualifying. If this is the case, try refinancing those debts. A few examples include:

  • Student Loans – If you have numerous student loans that were previously deferred or that you are still paying on despite having them for many years, they can really take up a large portion of your monthly income. Rather than paying several loans per month, try to refinance them into one loan with one low payment. This might extend the length of time it takes to get the loans paid off, but with the lower payment, you have more income available for a mortgage payment.
  • Credit Cards – Minimum credit card payments can add up when you have many of them going on at once. If you are able to apply for one card or even one personal loan that can pay off all outstanding credit cards, leaving you with one payment, you will likely free up some of your money for your mortgage payment.

When you refinance your debts, make sure the terms are favorable to you and that your new payment will be less than the combined payment of the multiple debts it is paying off. If you refinance credit cards, make sure to close out those cards so that they are not providing you with more available credit than is necessary as that can have an impact on your overall credit score, which plays a role in your eligibility as well.

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Pay Debts Off

If you recently started your business and have a lot of outstanding credit because of the costs necessary to start the business, try to get those debts paid off as soon as possible. The quicker you pay the debts off, the higher your credit score will rise and the lower your debt ratio will become. The more bank statements you are able to provide the lender with for a bank statement loan, the better your rate will be, so try to get those debts paid off in the beginning stages of starting your business, allowing your income to accumulate after the fact. This way when you show the lender 24 months or more of banks statements, you are able to have a lower debt ratio because you paid off those initial debts that helped you get started.

Wait Until you are in Business for a While

Along with the ability to have fewer debts, being able to show at least 24 months of bank statements will help you be able to have a higher qualifying income. When you just start your business, income can fluctuate quite a bit during that first year. If you wait 2 years and your income steadily increased, your 24-month average income will be higher than the 12-month average, which means you will have more income to use for your debt ratio, bringing it down even lower.

Managing your debt ratio in order to qualify for bank statement loans is one of the most important ways to get a loan as a self-employed borrower. There are many lenders that offer alternative documentation loans, giving you plenty of opportunity get a mortgage even though you are self-employed. The key is to have all of your documents in order and your debts as low as possible in order to maximize your qualifying income. Apply with a variety of lenders for a bank statement loan to ensure that you get the best rate and terms available today!

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