With all the changes in the mortgage industry that have evolved due to the foreclosure epidemic in our country it is going to be important to understand how to qualify for home loans in the future.
If you are self-employed, earn commission, and buy (or look to buy) investment properties or even your own home, then you are probably accustomed to not verifying your income on paper (with tax returns). It has always been easy and quite frankly your mortgage consultant may not know how to read tax returns. This can be a costly mistake because of how much more you will put down on the house or pay in costs or interest on the life of that loan. It is interesting that we are seeing the changes to qualifying for a mortgage take place at a time while all of us are thinking of income taxes. Here is a live example of the impact of being able to qualify on paper versus not being able to qualify on paper.
In the past (last year) I was able to buy an investment property with 0 money down and not verify my income on paper. My rates were high, but the mortgage didn’t have a prepayment penalty so I was happy. After I remodeled the property, I refinanced it and recaptured the expenses of remodeling the property. My new refinance occurred when the mortgage industry was upside down this spring. At that time I then took a loan in the range of 8% fixed for 7 years. Now that rates have hit 3-year lows, I have been looking to secure long-term financing for the future.
This is where it gets tricky. I have to be able to qualify on paper (2 years tax returns)! Why you ask? If I can’t, with all of the changes in the mortgage market I would have to keep my current mortgage and pay $1250+ per month in interest. That is simply because the new rules of the mortgage industry have limited the abilities for folks with investment properties to purchase or refinance unless they can verify their income on paper with 2 years tax returns. You also are limited in the terms of taking equity out of investment properties (85% of the value of the property) or purchasing a property, now requires 15% down. If you can’t verify your income that mortgage will cost you around $6,500 in closing costs and a rate ranging on 8.75% for the best loan program. Pretty expensive!
Back to my example: I will be able to drop the monthly interest by $350 per month with the new loan. If I were to take the monthly savings difference and send it back to the mortgage every month I would be effectively in about a 15 year loan, and would save well over $100,000 in interest over the life of the mortgage.
Being that it is the time of year that we are getting ready to file our taxes. Make sure you are looking at your deductions and monitoring taking excessive deductions. The reason I say this is, if you are self-employed, earn commission income and actively play in real estate (or even are buying your own home) you will need to be able to work with someone who can advise you on how to qualify for mortgages into the future. Part of what this means is you will have to show income on your tax returns for two consecutive years. If you take advantage of doing it for 2007 while you are filing your taxes here shortly, you can do an amendment to your tax return for 2006 to get your 2nd consecutive year. This will allow you to show the income on paper you need to qualify for mortgages moving forward.
If you are currently purchasing/refinancing your home or an investment property, are self employed or receive more then 25% of your income in commissions, give us a call (303) 779-0591 x2 to talk about how to qualify on paper and get the best mortgage for your future.