Blown Mortgage

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What happens when you take a diligent, government-insured, loan program that uses sound underwriting principles and paint it as the savior of the subprime masses?  You get a lot of frustrated people who are bewildered about their actual prospects of getting new financing.  Such is the case with FHASecure, the new Federal Housing Administration’s program for people with adjustable rate mortgages.

FHASecure is designed to allow people to qualify for FHA financing even with late mortgage payments on their credit; provided that those mortgage lates are the result of their adjustable rate mortgage moving higher, making the payments unaffordable.  That’s all fine and dandy, but what many people fail to realize is that FHA lending is not subprime lending as it has become known over the last several years.  In the past subprime lending allowed for stated income, dubious income documentation (such as letters of reference, business bank statements, etc.) and little or no borrower assets.   This led to a surge in borrowing, because now almost everyone qualified for low rates via subprime.  However, as those 2-year ARMs (2/28s) become adjustable those same people are finding it exceptionally difficult to qualify for financing; whether through FHA or a company still “doing subprime.”

This leads to increased borrower frustration as they feel they have to “jump through hoops” to get financing through FHASecure or other lending programs.  The fact is that these “hoops” are nothing more than sound underwriting guidelines that typically exclude subprime borrowers who in addition to poor credit have a poor financial picture and outlook to match.

Further, with the increased reliance and move to FHA due to the recent publicity surrounding FHASecure and the massive need of subprime borrowers to find alternative financing FHA underwriters are swamped with piles of files that  may or may not qualify for FHA.  Uneducated brokers and originators are throwing any subprime file at FHA to see if it will stick; and that is slowing down the whole FHA process for everyone.    If you decide to proceed down the FHA financing path, keep in mind that you need to have provable income and assets ahead of time; and understand you’ll need patience as the process can be much slower moving than traditional financing (or subprime financing from 2 years ago).

For more on the specific requirements that you will need to ensure that you qualify for FHASecure talk to a mortgage specialist; but for more general overview keep reading below.

This post will give subprime borrowers some tips that they can use to prepare themselves for refinancing when their 2/28 ARM becomes adjustable.  Whether your subprime adjustable rate mortgage is set to reset in 6 months, 3 months of 40 days; use the time remaining to fortify your financial position to provide you the best possible chances of qualifying for financing either through FHASecure, FHA or expanded approval financing channels (including what’s left of subprime).

Problems with Getting Financed Today

The main problems that previous subprime customers are facing today as obstacles to financing are:

• lack of income documentation
• lack of asset documentation
• poor credit history
• lack of home equity

Note: These are just general guidelines. There are of course niche products and lenders that can waive some of these requirements; be sure to talk to a mortgage specialist about your personal situation.

Lack of Income Documentation

To qualify for FHASecure, FHA or most other  types of financing these days you’ll need to have fully documented income available.  This is the case for most subprime borrowers, except for those that have better credit, have not missed a mortgage payment and who are looking to take out very small loan amounts compared to the actual value of their home (known as loan to value or LTV in the industry).  Because those people are unfortunately the rarity today, we’ll focus on people who may or may not have missed a mortgage payment, have less-than-perfect credit, and high LTV loans.

If you fall in to the second group you will need to fully document your income.  This means having W2 statements, recent paystubs, and the ability for your lender to verify your employment either via written or verbal confirmation with your employer.  If you are self-employed you will need to qualify off of your tax returns.  This can be an extremely difficult hurdle to overcome if you are self-employed and have been liberal in your deductions.

Action Steps: Ensure that your income is fully documented by your employer.  If you are being paid any amount “off the books” or “under the table” it will not be used by the underwriter for an FHA or expanded approval loan.  Also, ensure that you have copies of your W2 statements and paystubs ready; and provide those to your mortgage professional early in the process so that they can accurately calculate your income that can be used to qualify for your home loan.

Fully Documented Assets

Unlike past years, lenders want to see adequate money in the bank, called “reserves”, that will allow you to meet your monthly obligations (including your mortgage) moving forward should you run in to any unforseen hardships.  In the past subprime mortgages were underwritten with out asset requirements.  Today that is not the case.  You will need to provide bank statements (at least 2 months) or have your bank complete a Verification of Deposit (VOD) that shows your savings account balances are satisfactory to meet their reserve requirements.

Further, these reserves have to be “seasoned,” which means that there cannot be any large deposits within the last two months in to your savings or other liquid accounts.  If there are large deposits that can not be satisfactorily accounted for (sourced is the lingo here) then the underwriter will exclude those deposits from your reserve cash amount in determining your eligibility.

This means that if you have $2,000 under your mattress or in a shoebox or elsewhere it will not be used to determine your ability to repay the mortgage; which may exclude you from obtaining financing.  As a general rule you’ll want at least 3 months of mortgage payments in some form of bank account to qualify.  (This varies greatly, please talk to someone directly about your situation.)

This is also a good time to collect on any outstanding debts that you may have lent friends and family to get that money back in the bank.  Also, take a hard look at your expenditures and cut down on unnecesary purchases such as meals out, clothing and non-essential items.  Build that bank account up so that your case is compelling as possible when you attempt to qualify for new financing.

Action Steps: If you have cash that is not in a verifiable account such as a savings or checking account move it in to such an account ASAP and definitely 60-days before requiring financing.  This will give the money time to be seasoned according to underwriting guidelines and will satisfy the asset portion of the qualification.

Note: Underwriters will also take retirement accounts, 401(k)s and other long-term accounts as reserves.  Please note however that they will only take a certain percentage of the value of the account to apply to the reserves requirement.  This amount can vary; but it is often between 60% - 70%.  So if you have $1,000 in a 401(k) plan on $700 being counted toward your asset requirement.

Poor Credit History

We’ve discussed poor credit extensively in my series on how to improve your credit.  I have had many people write me and tell me that after following my advice they have been able to increase their scores more than 80 points in a very short period of time.  And it isn’t voodoo or rocket science; it’s simply understanding how the credit bureaus work and making sure the information reported at those institutions is accurate.  It behooves you to clean up your credit as much as possible.  Better credit = better interest rates and better loan terms - bottom line.

Action Steps: Read my 5 part series on credit management and begin to improve your credit.  Also, don’t apply for cell phones, new cars, gym memberships or credit cards.  These inquiries can pile up and negatively affect your credit.  These days one or two points on your score can make the difference between getting financing and being declined.

Lack of Home Equity

There isn’t much you can do to control the price of your home, which is why this note is last.  Worry about the above three and it will both improve your chances of qualifying for a home loan and also put you in a better financial place in general.  When considering your refinance options and are concerned abut the lack of equity in your home it is important to examine all avenues before making a determination that you have no options.

Action Steps: Get a free comparable sales check from a licensed appraisal in your area.  Many appraisers are willing to give you an estimation of value over the phone based on recent sales in your neighborhood.  If you have limited equity available consider FHA financing as it allows you to go to 97% loan to value on refinances that fit FHA guidelines.  It is one of the more aggressive high loan to value programs out there.

In closing, people who are coming out of subprime 2-year fixed mortgages and in to the adjustment period can not simply pick up the phone and lock-in a new loan.  There are tighter guidelines which require a stronger financial platform for borrowers to qualify.  I implore you; if you are in a 2/28 ARM right now that is going to reset in the near future begin working today to improve your financial outlook.  Cut down on expense, improve your credit, build assets or you will risk losing the home you are living in as your payments adjust upwards and your options are few and painful.  It’s not a scare tactic, it’s simply the truth.

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