By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | January 24, 2021
Underwriters are tasked with predicting the future. Going forward, are you going to make your house payments? Are you a good credit risk?
Now consider the gravity of granting credit to mortgage applicants during a pandemic. The COVID-19 economy has become a weekly whipsaw of sorts. It’s crashing. Wait. No. Now, it looks to be recovering. Oh, it’s bad again. Oy vey.
Where do you fit in? Is your job stable? Or might your employer keep you on the team but cut your wages back by 20% as your industry is still softening? If you are self-employed, will your customers keep coming? Will some stiff you on the invoice because their customers stiffed them? Cash flow problems always run downhill.
I polled several lenders. Topping everyone’s list of COVID-induced loan denials is income instability realized as too low debt-to-income ratios or DTI. Simply stated, your total house payment plus recurring monthly bills divided by your monthly gross income is the lenders’ number one crystal ball predictor to determine your ability to pay. Generally, well-qualified borrowers get the green light under 50% DTI from Fannie and Freddie. FHA and VA offer higher allowances.
For example, say your salary was $150,000 per year but your wages are temporarily cut by 20% to $120,000. You are at $10,000 per month compared to your previous $12,500 per month. You applied to refinance a $500,000 mortgage, currently at 4% but eyeing a new 2.75% rate which means $346 in lower house payments, about a 15% mortgage payment reduction. You go from $2,387 to $2,041.
Assuming your new total monthly bills add up to $6,000, your ratios work based on your pre-COVID wages at 48% ($6,000 divided by $12,500). But post-COVID at $10,000 per month in wages, your ratio is 60% ($6,000 divided by $10,000). Even though you are knocking your payment down nicely and your salary cut is temporary, no loan for you because your DTI is too high, according to Fannie and Freddie. Crazy, isn’t it?
Small businesses, mom-and-pop and the like are particularly difficult for underwriters to figure out as it concerns ongoing viability. Owning 25% or more of a business or being paid as an independent contractor on a 1099 means you are self-employed in mortgage parlance.
Pre-pandemic, the previous year or two of business tax returns or Schedule C 1040 income was front and center for income calculation purposes. Since COVID-19, lenders are requiring a year-to-date profit and loss statement, current within 60 days of new loan funding. Additionally, the most recent three months of business bank statements are required for cash-flow analysis.
The key is net income consistency (or better) compared with last year’s tax returns. Business bank statements are used as a sort of forensic accounting to validate and support the profit and loss numbers. Some lenders may ask for year-to-date business bank statements (not just three months), especially for businesses in industries hard hit by the pandemic.
Say your income collapsed for three months at the beginning of the virus outbreak. Everything is back to normal income and cash flow is good. Your COVID-year DTI qualifying ratios may not get you there because you lost 25% of your income. Payment Protection Plan or other grants cannot be used for income-qualifying purposes.
COVID-induced forbearance programs are also giving lenders fits in the loan approval realm. Fannie and Freddie want you to make three consecutive payments or pay-up the accrued missed mortgage payments before getting a new mortgage. At least one lender that I know of will allow you to make up your third payment prior to the funding of a new mortgage.
Instead of making three consecutive payments, what about a cash-out refinance to clear out the accrued missed payments that were lopped onto your mortgage billing statement? Sorry, no can do. You have to pay up first. One lender offered the bright idea of gift funds from a parent (perhaps early inheritance) to pay back the missed payments. Then, take advantage of record-low mortgage rates, proceeding on the refinance.
My best advice is to plan ahead. Before formally applying for your purchase or refinance mortgage, get your numbers and documents together. This is a perfect time of the year to go to your tax preparer and get a draft of your 2020 tax returns. Show that to your mortgage professional to see if you qualify. If you don’t qualify, ask what you need to do to get the green light.
Freddie Mac rate news: The 30-year, fixed-rate averaged 2.77%, down two basis points from last week. The 15-year, fixed-rate averaged 2.21%, also two basis points lower than last week.
The Mortgage Bankers Association reported a 1.9% mortgage application decrease from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed-rate on a conforming $548,250 loan, last year’s payment was $249 more than this week’s payment of $2,244.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with a 1-point cost: A 30-year FHA at 2.125%, a 15-year conventional at 1.875%, a 30-year conventional at 2.5%, a 15-year conventional high balance ($548,251 to $822,375) at 2.125%, a 30-year high balance conventional at 2.5% and a jumbo 30-year fixed at 2.875%.
Note: The 30-year FHA conforming loan is limited to loans of $477,250 in the Inland Empire and $548,250 in Los Angeles and Orange counties.
Eye catcher loan program of the week: A 15-year fixed rate at 2.125% without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011