The Mortgage Guru

The federal government has decided that starting October 1, 2009 banks and lenders will no longer be able to offer stated income loans unless they can verify the borrower’s ability to pay back the loan. If the borrower takes out an adjustable rate mortgage the lender will have to qualify the borrower based on the highest possible payment after the adjustment. I have mixed feelings about this.  If you go back to the Carter administration our government told lenders to lower their lending standards in order to increase home ownership in America. This ultimately led to subprime mortgages and the current mess we are in. In my opinion stated income loans should be exclusively for self-employed borrowers who do not receive W-2’s and standard tax returns. The problem we are having with subprime mortgages was caused by lenders allowing a borrower that could prove income with W-2’s and tax returns to state any income they needed (”within reason” the lenders would say) in order to qualify for the loan they wanted. “Within reason” is in the eye of the beholder. I saw loan officers stating $10,000 per month income for school teachers and line cooks on the strip.  You can’t put all the blame on the loan officers or the borrowers. The banks were dangling the carrot and everybody got greedy. I personally had clients in my office who would flat out tell me ‘give us the loan we want or we’ll go down the street and get it from someone else.’ We all have families to feed, what would you do?

So the pendulum has swung to the other extreme and self-employed borrower’s cannot find money to borrow. Unless you are a full doc borrower that falls under FHA guidelines, there is no guarantee you will get financed. Not because you are not a good borrower but because the lenders have limited money to loan and their safest bet is an FHA backed loan.

If you are self-employed you have the following two options:

First off you need at least a 680 mid FICO score and most lenders require 700. If you want to go stated income you will need to put down 30% of your loan amount; there are a couple lenders who will allow 20% down but who knows how much longer they will offer this.

If you are self-employed and want to go full doc the FICO requirements remain the same but you most show full tax returns and here’s the rub. Unlike W-2 borrowers who work off the gross income, self-employed borrowers are qualified off the net. Essentially if you make $100,000 gross income and you write off everything you can at tax time bringing your net income to $40,000 you may not qualify for that home you want.

Bottom line is this, the government started regulating lenders forcing them to lower their lending standards to increase home ownership and is now regulating them again now that things have gone haywire (without taking any responsibility for our current situation). The stated income loan that was intented for self-employed borrowers was essentially ruined by lenders allowing W-2 borrowers to utilize this program.

I’m very interested to see what happens next on this wild ride…

Tags: stated income, subprime //