Calculating Income of Employed W2 Borrowers for Mortgage Qualifying

Jillayne wrote a post about the upcoming national licensing exam that mortgage originators will have to take and pass (unless they work for a depository institution) due to the SAFE Act.   She provided examples of questions that may be on the exam.  One of them is how to calculate income–which is receiving quite a few comments on her post.

If an applicant works 40 hours every week and is paid $13.52 per hour, what is the applicant’s
monthly income?
(A) $2,163.20
(B) $2,343.47
(C) $2,379.52
(D) $2,487.68

The correct way to calculate this is 13.52 x 40 hours x 52 weeks divided by 12 months = (B) $2,343.47.   The mortgage originator should also review the last two years W2’s to make sure the income is steady or increasing.   If it’s decreasing, this will need to be explained and the income may be averaged or a lower income may be used.   For example, if the borrower recently had their hours cut due to the economy, the new lower figure will most likely be used.   What’s most important is steady hours for the hourly employee…a recent jump in hours may not be considered either.

It’s important that the borrower has a minimum of a two year history in their line of work in order to be able to use the income (secondary education may be able to count towards the two year requirement).   If someone started a second job one year ago as a waitress for supplemental income, it might not meet the criteria to be factored towards income unless the borrower had a second job in the same industry over the past two years.

Overtime and bonus income needs to be received for the past two years to be factored for qualifying as well.   Again, this boils down to stability and trends with income are heavily considered.    

Commission incomes (W2) requires a two year history as well and the income is averaged.  If a borrower’s commission income is more than 25% of their annual income, they’re treated more like a self-employed borrower.  They’ll need to provide their last two years complete tax returns and non-reimbursed business expenses that are claimed on the tax return will be deducted from the gross income (they’re treated more like a self-employed borrower).  A situation that I’ve seen is where a borrower was paid a salary and then received a promotion where they had greater earning potential.   The employer reduced their base and added a commission structure.   Because the commission was a new feature to the income, only new lower base income was used for qualifying.

It all pretty much boils down to showing stability over the past 24 months and recent trends when calculating income.   Also be prepared to complete a Form 4506–even if you’re paid salary–as a measure to prevent fraud.   Lenders may also require a Verification of Employment with your employer to confirm the information provided regarding employment, income is accurate and that employment is likely to continue prior to funding your new mortgage.

There are many other types of income–for purposes of keeping this post short, sweet and simple, I’ve stuck to income that’s reported via a W2 and a “full doc” loan.  

Hopefully you’re working with a Mortgage Professional who reviews your income documentation upfront and calculates it correctly…and I hope you’re quickly providing the information that is being requested so that you’re properly qualified in the beginning of the process.   Nobody likes to get involved with a transaction to find out that the underwriter is not going to use the income that was used on the application because it was figured incorrectly.

Questions?  Ask!  🙂

Settlement Statement: Is the interest rate of the Note disclosed on the form?

It is routine for escrow departments of title companies and independent escrow firms to provide a Settlement Statement to a loan officer (and agents) prior to making appointments with clients to sign their paperwork.   Once loan documents are received by escrow the closing staff move to get this accomplished as quickly as possible.  This is done for a variety of reasons but mostly to assist in ironing out any discrepancies prior to meeting with the client.

If you reconciled a “yes,” the interest rate is on the Settlement Statement, you are correct.   So, where is it:

  • Line 901 of the Settlement Statement
  • If a borrower has a loan, it is on Line 901 to calculate interest (see screenshot)

Can this be missed even after escrow receives a HUD approval “green light,” “all OK,” “call the borrowers to make an appointment?”   Unfortunately, yes.   Hopefully this post will assist consumers and those in the business that were unaware that this is on the Settlement Statement and to prevent situations where escrow is meeting a client at their home at 8pm to sign docs and hear the client remark, “this is not the rate/program we were quoted.”

Interest rate on HUD

Will the New National Loan Originator Exam be Too Easy?

I just took a look at the sample questions provided by the National Mortgage Licensing System for the new national loan originator exam and I must say these are so easy why even bother with a test?  Let’s take a look:

If an applicant works 40 hours every week and is paid $13.52 per hour, what is the applicant’s
monthly income?
(A) $2,163.20
(B) $2,343.47
(C) $2,379.52
(D) $2,487.68

The requirement for private mortgage insurance is generally discounted when the loan-to-value ratio falls below:
(A) 20%
(B) 50%
(C) 80%
(D) 90%

Which of the following documents itemizes all settlement costs including lender charges?
(A) Agreement of sale
(B) HUD-1 form
(C) Form 1003
(D) Forbearance agreement

A discount point is BEST described as a charge the borrower pays to:
(A) a lender to decrease the interest rate on the mortgage loan
(B) a mortgage broker at the time of application to obtain a favorable rate
(C) the seller as part of the closing costs of a loan
(D) a lender to ensure against foreclosure

Which of the following methods of disclosure does NOT meet the requirements of the Equal Credit Opportunity Act (ECOA)?
(A) E-mail
(B) Mailed letter
(C) Telephone
(D) Faxed letter

What does a loan originator use to determine the estimated value of a property based on an analytical comparison of similar property sales?
(A) An appraisal
(B) A market survey
(C) An area survey
(D) A cost-benefit analysis

But perhaps I’m being to harsh. We have a vast number of unlicensed loan originators who are working for companies licensed under the Consumer Loan Act. We call these folks “consumer loan lenders,” or “non-depository lenders.”  Rhonda Porter sometimes refers to these folks as “correspondent lenders.”  They differ from a mortgage broker because by definition, a lender is an entity that has the ability to make the loan (fund the loan) and a broker is a middleman who does not make or fund loans, but FINDS the lender for a fee.  Mortgage broker LOs are licensed in WA State but consumer loan company LOs are not.  Yet. 

Consumer loan company LOs can start to take their new national exam beginning July 31, 2009. Their real deadline is July 1, 2010 so it looks like I need to block off May and June 2010 for exam prep classes next year as predict the majority will put it off until the last possible days.

Anyone who has been originating for any length of time need not be afraid if the test questions are going to be this easy.  Once the test launches I will go take it and let you know. 

Perhaps for folks who are brand new to mortgage lending, these test questions might seem a little more challenging. That is the whole purpose of national testing and licensing: To create a minimum barrier to entry.  The regulators at the federal level have put a lot of time and care into the education portion of the new law.  Let’s hope that their chosen test vendor, Pearson Vue (who absorbed Promissor) doesn’t use the same old tired bank of test questions that’s been around for a decade.

Update: Prometric is also a test vendor for the new NMLS exam.  Here’s a link to their website.

No Big Rate Surprise with the FOMC

The FOMC wrapped up their two day meeting leaving the Funds Rate unchanged.   The target rate is remaining at 0-0.25%.  Now that this decision has been formally announced, everyone will be reviewing the Fed’s statement for clues on when they will begin to raise the Fed Funds Rate.

From today’s FOMC Statement:

…the Committee expects that inflation will remain subdued for some time.

As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Green Living – Authenticity

clothes pinDoes your neighbor who just bought a “hybrid” car, complain when you hang clothes out to dry?

One of the things I like most about Seattle and The Pacific Northwest generally, is the sincere desire to improve.  Improve the environment, improve the quality of life, not only for themselves but for those around them.

…and they can smell BS from a mile away!

Seems to me that every time the subject of Green Homes comes up, there’s some new and more costly “green” improvement. Or some “green” label that is supposed to make “the product” sell at a higher price as a result. A marketing “gimmick”.

I write this post in an effort to share “real” green living tips. I am so NOT a “green” expert, and I’m very hopeful that others will join in here. I am however a strong proponent of “Waste not; Want not” and rewarding people with “the right why”.

I grew up in the days when everyone hung their heaviest clothes out to dry. We had clothes dryers, but we were also conscious of how much energy it took to dry a pair of jeans. We also knew our jeans kept their color and lasted longer if we hung them to dry vs. putting them in the clothes dryer.

When my children were small, we had a huge vegetable garden. Way too many vegetables for us to eat ourselves. I remember having the girls fill up the little red wagon with cucumbers and tomatos and green peppers. We went door to door and gave each of our neighbors a few days worth of our produce. I also remember the surprise when the neighbors realized it wasn’t a “business” for the children, and the vegetables were gifts and free.

Given the state of the economy, I’d like to add a proponent of Cost Factor. My idea of “recovery” is to find a happy medium, not to get back to where we once were.  I actually WANT the economy to stay down, and for people to adjust their lifestyle accordingly. The Age of Greed and Excess is over. Even for those with plenty of money, it is no longer fashionable to flaunt that fact. Even celebrities suddenly realize that every dollar they waste on more bling, would have been better spent feeding a hungry child.

Yes, businesses will fail. But maybe it’s time a business that sold a baked potato for $8 SHOULD fail. What did it cost them? A dime?

The #1 thing you can do is to be authentic in your approach. Don’t spend more for something just because you can finance it. (Yes, that includes real estate commissions.) Treat every dollar you make and spend as a “public trust” to improve the world around you. It’s a lofty goal and change doesn’t happen overnight. Instead of looking down your nose at a neighbor who hangs a pair of jeans on the line outside, look down your nose at a neighbor who has a beautiful lawn that they water twice a day.

1) Remove all clothesline bans

It always amazes me that the same people who don’t want the government putting restrictions on their lives, will be the first to complain if they see a neighbor hanging a sheet or blanket on a clothesline. I’m not sure why you never see people hanging clothes out on a nice day, but if it’s because they are “not allowed” to do that…change that.

2) Grow something from the seeds of that which you have already grown.

What a wonderful lesson for children. When my children were small, we always visited their great grandparents and great aunts and uncles who lived in another State in the Fall. I am reminded of this everytime I pass by the many marigolds on display today. We used to “bring the relatives home with us” by collecting the dead flower heads…the portion that contained the new seeds. We would put them in a paper bag when we collected them, and we would plant them the next spring at our home. While we only saw those relatives once a year, we added them to our daily lives and thoughts via “seed collecting”. Here’s a good “how to” on collecting seeds and having new plants from something you have already grown.  I learned this from my mother. A wonderful tradition to hand down from generation to generation. My grandmother used to collect and cook dandelion greens (with sausage and pasta sauce), but I’m not sure we’re quite ready for that lesson 🙂

Another fabulous idea for a housewarming gift is to split your bulbs and bring a free and lasting gift to a new neighbor, or even plant them in your local traffic circle.  You want to be careful to time this appropriately, as the “green” of the plant feeds the bulbs, so you don’t want to simply “dead head” and dig up when the blossom fades. But what a wonderful gift! Nature gives you abundance by mulitplying itself! Yet how often do we dig up the bulbs and plant this new gift of nature, vs. going to the local garden store to buy bulbs? Something to think about.

3) Get some exercise while helping someone in need

There is recently a huge public outcry regarding the unkempt appearance of homes in foreclosure.  Sometimes the home is vacant. Sometimes the distressed homeowner is having difficulty paying their utility and trash bills. Even if the owner can go out and pile up the yard waste, they may not have the means of disposing that yard waste due to unpaid trash bills. (Recent example I have witnessed first hand.)

Every “help” organization: Senior Centers, Hopelink, any and all organizations that help the disabled, should have a list of people who can use a lending hand with their yardwork.  If every person traded just one day at the gym, for some honest “helping hand” physical labor, the world would be a better place. 

In many, many ways we are talking about replacing bad thoughts with good ones. Instead of complaining about the neighbor’s yard, assume there is a very good reason why they can’t do what they are not doing.

Don’t ever offer to “fix” someone’s something, as that is a negative “judgement”. Instead, ask if the neighbor might help YOU by allowing you to do some of their needed yardwork. Explain how you need more exercise, or how much you love to garden and you have no gardening left at your place that needs doing.

Remember that when you help someone, you do so by asking them to help you..because the real joy is in the giving.

Top 3 Reason to Love Facebook Pages

We already know the folks at RCG love twitter, and while I like twitter, the marketer in me has completely fallen for Facebook Pages (note: these are a very different beast than Facebook profiles)… and if you’re running a small business, there are many reasons you should be interested in FB Pages too.

The three main reasons I’m been putting a ton of energy into building out Facebook Pages for my clients lately are:

  • Traffic: at this point traffic from social media feeds (like twitter’s stream and Facebook’s newsfeeds) are generating more traffic than RSS feeds for almost every website I run.
  • Engagement: For new sites, it’s becoming harder-and-harder to build a “community” on your own site without tapping into the communities where they already exist (Twitter, Facebook, etc.)
  • Reach. Unlike Twitter, Facebook Pages allow you to get into the highlights and recommendation sections of fans… allowing you to reach the often elusive “friends of fans.”   For most small businesses, the friends of your fans are a ridiculously relevant audience and even more relevant than traditional SEO traffic.

rain city guide on facebook

By the way, I was inspired to create this post because I JUST created a Facebook Page for Rain City Guide and of course, I’m hoping you’ll join up and become a fan.

Similar to the Rain City Guide blog, I’m going to be using the page to engage with folks about Seattle real estate.   It’s not that we “need” another place for a conversation, but rather an experiment to see what it will look like when we take the typical RCG conversation to the Facebook audience.

Of  course, many of the stories on the Page will be about RCG articles, but truth be told, I’ll be looking to link out to any real estate articles I think will interest people interested in Seattle real estate.  So, if Facebook is the place you’d like to engage, join the conversation by becoming a fan of RCG!

And if you’re interested in a seeing a more developed implementation of Facebook Pages, check out the business page I created around my social media consulting and speaking.  In just a few months, it’s grown to over 1200 folks who are consistently engaging in ideas around using social media to generate business.

Is Your Open House In The NWMLS For ALL To See?

FrontThe last few weeks have been extremely busy open house wise for us in Seattle – mostly in the $400,000 and under price range or close to it.  Agent hits on the NWMLS for those listings has also soared and the web traffic in general has increased for this price point.   The buyers are definitely out there poking around!

Many of  my recent open house visitors have been Redfin buyers.  They seem to expect to be treated poorly by other agents at opens.   Maybe this is just my own perception, but they are physically cringing upon entrance.  I guess it could be my outfit or my hair, but more likely it must have to do with the typical reception a Redfin buyer might get.  The point of an open house has always been for the hosting agent to meet, network, and possibly pick up new clients.  Although it is also great exposure for the listed property, very rarely does the open house sell the home – at least it didn’t used to

Enter Redfin. 

Redfin arguably has one of the nicest real estate search websites and their open house feature is probably second to none.  I can’t keep up with their changing business model and have no idea how effective or not they are for their clients, but do love their site and always welcome Redfin buyers to my open houses.  Redfin buyers seem to almost always be actively looking for a home.  They meticulously schedule and map out the open houses they plan to visit and they come with questions prepared.  In short, they are serious.

One little problem: 

Open houses that show up on the site are swept from the NWMLS when a listing agent enters the information in the “public open houses” field of their listing and not all listing agents do this.  Some companies prefer to hold on to that information and only enter their open houses on their corporate site alone.   Soon enough, though, most agents will hopefully catch up and realize that not entering their opens for all to see is a disservice to the seller.    Just looking at Seattle stats alone in the NWMLS, Redfin has sold 62 residential properties and 9 condos since the beginning of the year.  Redfin buyers are clearly putting a dent in the inventory. 

Redfin aside, it is just smart business and good representation to enter your open house into the NWMLS so that you expose your seller’s property to as many potential buyers as possible.

The Buyers are out, and trying to buy, but…

Buyers are out, and trying to buy, but they don’t seem to be quite as successful as some of the more breathless news reports would lead you to believe.  I have always liked the Pending Sales statistics from NWMLS because they represent the most recent monthly snapshot of new contracts on listed properties – i.e. a Buyer and a Seller have made a deal.  But recently a lot of those ‘deals’ have not closed, the Seller has not gotten his or her money, and the Buyer has not gotten possession of the property. It appears that a lot of these current transactions, which are indicating a high level of Buyer’s intent to purchase, are falling out or being delayed for long periods.

Here is a chart built from NWMLS published statistics of Pending vs Sold data – the chart is built by taking a two-month moving average of Pending (previous month) vs Sold (current month) data. Note that this post expands on an earlier post by Ardell in her Sunday Night Stats.

Let’s call this chart the Fall-Out Ratio – we may want to keep an eye on it.

(Required disclaimer: Statistics not compiled or published by the Northwest Multiple Listing Service)reilingteamcom-fall-out-ratio-0906

Historically the fall-out rate has been well under 10%, but then in early 2008 the fall-out rate started climbing like a rocket. Recall that we had the mortgage market meltdown in late 2007, and lenders started dramatically tightening their lending practices. Then we had the larger financial and business crash in late 2008, and more people started losing their jobs – and the other 90% got nervous. It was also in late 2008 that we started seeing a lot more short sales in our Seattle/Bellevue area. Recall that in a short sale, the insolvent seller is trying to avoid foreclosure by selling the property and getting the lender to accept less than is owed on it. That lender approval process is often slow and uncertain, and it certainly is contributing to this rise in the Fall-Out Ratio. Short sales may be 20% or more of our current sales activity, and those delays may also be a major contributor to why the average Days-on-Market measure isn’t dropping in concert with Months Supply. Other contributors to the fall-out rate would include failure to reach agreement on inspection, and failure of financing. I’m sure we’ll get a lot more insight on causes from the comments by our great RCG contributors.