The snag of part-time income

The snag of part-time income

Sep 27, 2013 Kenneth R. Harney

WASHINGTON — It’s an issue that hasn’t gotten much attention, but should be a red alert for first-time buyers and others who supplement their incomes with part-time work: Though part-time earnings are playing an increasingly important role in the post-recession American economy, the income you earn part time may not count when you go to buy a house.

What? Isn’t income always income? If you make $42,000 from your regular full-time job and another $18,000 by working part time at a second job, isn’t your gross income $60,000?

The IRS would tell you it is. But mortgage lenders may disregard the $18,000 unless you can document that you’ve been receiving the extra money steadily for two years and the pay is likely to continue.

There might be some wiggle room on this depending on your specific circumstances, but under rules established by the dominant players in the home loan market — Fannie Mae, Freddie Mac and the Federal Housing Administration — part-time income generally isn’t “qualifying income” for mortgage purposes until it’s been flowing for a couple of years.

The problem can be especially severe for borrowers with moderate incomes who have solid credit histories and have taken on second jobs to support their families. Robert Montalbo, a loan officer in San Antonio with Premier Nationwide Lending, a mortgage banking firm, says he sees many credit-worthy applicants who “get a [part-time] second job to make ends meet” and who simply want a piece of the American dream — to buy a home of their own.

“Even if they can show they’ve worked at that [part-time] job for 16 months straight I may have to turn them down,” Montalbo said in an interview.

But modest-income applicants are hardly alone in confronting the problem. Richard M. Bettencourt Jr., a branch manager with the Mortgage Network Inc., in Danvers, Mass., recounts a recent experience he had with a borrower who earns $96,000 a year. The applicant had been self-employed as a certified public accountant for 12 years but had to close his business because of a heart condition. However, two of the CPA’s previous clients convinced him to accept part-time positions for their firms. He received regular salaries from both companies but had worked for only one of them for more than two years. As a result, only the salary from that company qualified as “income” for mortgage application purposes; the earnings from the other were deemed ineligible by underwriters.

“Because of the guidelines” — in this case Fannie Mae’s rules — “I had to deny him a mortgage because the ‘second’ job was not on the books for two years,” said Bettencourt. “How’s that for a scenario?”

Part-time income snags like this could prove to be an increasingly important constraint to the housing market recovery, especially since relatively few prospective buyers who depend on part-time work become aware of the problem until they apply for a loan.

According to data released earlier this month by the Bureau of Labor Statistics, 7.9 million Americans were employed part time “for economic reasons” in August — 4.8 million worked part time because of “slack work or business conditions,” 2.7 million “could only find part-time work” — and 19.3 million worked part time for “noneconomic reasons.”

Keith Hall, who served as commissioner of the Bureau of Labor Statistics between 2008 and 2012 and is now a senior research fellow at George Mason University’s Mercatus Center, says the proportion of jobs in the economy that are part-time has been climbing and is now 19.4 percent, up from 17.4 percent just before the recession.

Some analysts predict the percentage could rise even higher if businesses seeking to avoid paying insurance premiums for full-time employees under the Affordable Care Act (Obamacare) downshift large numbers of positions to part-time.

The two-year rule for counting part-time income has been an industry standard for years, and was recently incorporated into regulations adopted by the Consumer Financial Protection Bureau. The rationale is straightforward: If part-time income hasn’t been established for an extended period of time, it may not be dependable or available in the future to make monthly payments on a mortgage. The industry also has restrictions on qualifying seasonal income and overtime earnings.

Equally important, in an era of conservative underwriting and full documentation, there’s little likelihood that Fannie, Freddie or FHA will loosen their standards. So homebuyers with part-time income need to know the sobering fact: You may assume that all income is equal. But it’s not.

Some signs of credit-score easing

Some signs of credit-score easing

Sep 20, 2013 Kenneth R. Harney

WASHINGTON — Could the end of the refinancing boom be stimulating slightly more favorable mortgage terms for homebuyers? The latest comprehensive study of activity in the market suggests the answer could be yes.

Ellie Mae, a mortgage technology firm based in Pleasanton, Calif., conducts a widely regarded survey involving a massive, nationally representative sample of loans closed each month. Its August findings, released this week, point to a gradual easing on credit scores for borrowers.

Consider these hard numbers provided by Ellie Mae CEO Jonathan Corr:

Reverse mortgages tightening up

Reverse mortgages tightening up

Sep 13, 2013

Kenneth R. Harney

WASHINGTON — For homeowners who were looking to the federal government’s reverse mortgage program to supply lots of cash for their retirement years, here’s a heads-up: The pipeline just got narrower.

Pressed by Congress to slash losses, the Federal Housing Administration last week outlined a series of steps designed to limit the maximum amounts that seniors can draw down on their homes and to make qualifying for a reverse mortgage tougher.

Starting in January, applicants for FHA-backed reverse mortgages will for the first time have to qualify under comprehensive new “financial assessments” — covering credit history, household cash flow and debt levels– to make sure they have the “capacity and willingness” to meet their financial obligations under the terms of the loan. At the same time, they may also be required to set aside sizable portions of their drawdowns to handle property taxes and hazard insurance for years to come. As early as next month, some applicants will also be required to pay substantially higher FHA insurance premiums if they pull out hefty amounts of funds upfront at closing.

Reverse mortgages are limited to homeowners 62 and older, and allow them to use the equity in their properties to provide funds for their retirement years. Borrowers need not repay their principal balances — plus compounded interest charges — until they move from the home, sell it or die.

FHA’s insured reverse-mortgage program, which is hawked aggressively by TV pitchmen including former Tennessee Sen. Fred Thompson, Henry “the Fonz”

Winkler and Robert Wagner, dominates the field. But losses to FHA’s insurance funds caused by reverse mortgages have mounted in recent years, and could trigger a nearly $1 billion bailout by the Treasury. FHA hopes to avoid that, however. The newly imposed eligibility and drawdown rules are intended to cut losses and help achieve greater financial stability for the program, according to Carol J. Galante, FHA’s commissioner.

Limits on the amounts that seniors can draw down, higher mortgage insurance fees and rigorous financial vetting of applicants are worrying some lenders and brokers active in the program. They estimate that the maximum drawdowns seniors can obtain will be reduced by about 15 percent, compared with the popular “standard” version of the program that has now been phased out.

Borrowers who take more than 60 percent of the maximum amounts available to them upfront will also pay substantially higher insurance premiums. The changes are likely to reduce the attractiveness of reverse mortgages to large numbers of seniors, according to some industry specialists. Matt Neumeyer, owner of Premier Reverse Mortgage LLC in Atlanta, estimates that as many as 40 percent of previously eligible borrowers will look at the reduced limits, the new financial assessments and higher fees and say: no thanks.

“You’re offering me less on my house for a whole lot more hassle,” — that’s how clients will see it, Neumeyer said in an interview. “A lot of people are going to balk.” He offered this example of how the reductions would work.

For a 70-year-old owner with a $200,000 house, the standard version of the program would have offered a total “principal limit” — the amount available to the borrower — of $132,600. Under the revised program, that will be cut by nearly $20,000 to $112,800, provided the applicant can make it through the financial assessment hoops. And if the borrower wants to pull down more than 60 percent of what’s available, he or she will get hit by higher mortgage insurance premiums. Add in the set-asides for future property taxes and hazard insurance that may be subtracted from the initial drawdown of funds, said Neumeyer, and many borrowers will look at either selling their home or obtaining a home equity line.

Deborah Nance, a reverse mortgage specialist with iReverse Home Loans LLC in the Los Angeles-Riverside, Calif., market area, agrees that fewer seniors will qualify for FHA reverse mortgages but believes they will be predominantly borrowers with lower incomes, higher household debt loads and more marginal credit histories — “the needy people” who previously would have taken the maximum lump-sum drawdown to pay off mortgages and other obligations but now will be prevented.

Nonetheless, she said in an interview, “we’ll still be able to help a lot of people.

” Cristina Martin Firvida, director of financial security and consumer affairs for AARP, the seniors lobby, said while she understands that FHA must cut losses, inevitably “the changes … will bar access to reverse mortgages for many.”

Reverse mortgages tightening up

Reverse mortgages tightening up

Sep 13, 2013 Kenneth R. Harney

WASHINGTON — For homeowners who were looking to the federal government’s reverse mortgage program to supply lots of cash for their retirement years, here’s a heads-up: The pipeline just got narrower.

Pressed by Congress to slash losses, the Federal Housing Administration last week outlined a series of steps designed to limit the maximum amounts that seniors can draw down on their homes and to make qualifying for a reverse mortgage tougher.

Starting in January, applicants for FHA-backed reverse mortgages will for the first time have to qualify under comprehensive new “financial assessments” — covering credit history, household cash flow and debt levels

For short-sellers, some good news

For short-sellers, some good news

Kenneth R. Harney Sep 6, 2013

Policy changes by two of the biggest players in the mortgage market could open doors to home purchases this fall by thousands of people who were hard hit by the housing bust and who thought they’d have to wait for years before owning again.

Fannie Mae, the federally controlled mortgage investor, has come up with a “fix” designed to help large numbers of consumers whose short sales were misidentified as foreclosures by the national credit bureaus. Under previous rules, short-sellers would have to wait for up to seven years before becoming eligible for a new mortgage to buy a house. Under the revised plan, they may be able to qualify for a mortgage in as little as two years. Homeowners who are foreclosed upon generally must still wait for up to seven years before becoming eligible again to finance a house through Fannie. Industry estimates suggest that more than 2 million short-sellers might be affected by credit bureaus’ inaccurate descriptions of their transactions.

Meanwhile, the Federal Housing Administration (FHA) has announced a new program allowing borrowers whose previous mortgage troubles were caused by “extenuating circumstances” beyond their control to obtain new mortgages in as little as a year after losing their homes instead of the current three years. They will need to show that their delinquency problem was caused by a 20 percent or greater drop in income that continued for at least six months, and that they are now “back to work,” paying their bills on time and earning enough to qualify for a new FHA-insured mortgage.

Fannie Mae’s policy change came after months of prodding by the federal Consumer Financial Protection Bureau, Sen. Bill Nelson, D-Fla., the National Consumer Reporting Association, the National Association of Realtors and Pam Marron, an outspoken Florida consumer advocate. They all sought fairer treatment of borrowers who had participated in short sales in recent years. Marron, a mortgage broker, spotted the erroneous reporting of short sales on credit reports and mounted a campaign to correct the problem.

In a short sale, the lender approves the sale of a house to a new buyer but typically receives less than the balance owed. In a foreclosure, the bank takes title to the property and seeks to recover whatever it can through a resale. Though the two types of transactions are distinct and involve significantly different losses for banks — foreclosures are far more costly on average — the nation’s major credit bureaus have no special reporting code to identify short sales. As a result, say critics, millions of people who have undertaken short sales in recent years may have their transactions coded as foreclosures on their credit bureau reports.

That matters — a lot — because Fannie Mae and other major financing sources have mandated different waiting periods for new loans to borrowers who have completed short sales compared with borrowers who were foreclosed upon — in this case, two years versus seven. Under the new policy, which takes effect Nov. 16, short-sellers who find that their transactions were miscoded on their credit reports, and are able to put 20 percent down, should alert their loan officers and provide documentation on their transaction. The loan officer should advise Fannie Mae about the credit report coding error. Fannie will then run the loan application through its revised automated underwriting system.

Freddie Mac, the other government-administered mortgage investor, continues to require a four-year waiting period for short-sellers who cannot demonstrate “extenuating circumstances” as having caused their problems. If they can do so — documenting income reductions beyond their control that wrecked their credit — they may be able to qualify for a new Freddie Mac loan in two years.

FHA’s policy change may prove to be an even more generous deal for some previous homeowners. Like Freddie Mac, FHA wants to see hard evidence of what economic events beyond the borrowers’ control — loss of a job, serious illness, or death of a wage earner, for example — led to the delinquency or loss of the house. Applicants must be able to show 12 months of solid credit behavior, participate in a housing counseling program and get through the agency’s underwriting hoops. But unlike either Fannie or Freddie, if you qualify under FHA’s revised rules, which are now in effect, and your lender approves, you might be able to buy a house with a new, low-down-payment mortgage in as little as a year.

It’s worth checking out.