When underwriting a loan, lenders follow the guidelines of Freddie Mac and Fannie Mae, the largest buyers of mortgage loans and the FHA for government loans. Mortgage professionals know the advantages and disadvantages of each, and now… so will you.
When you have disputed credit report tradelines: Choose an FHA or Freddie Mac loan. Both agencies accept them as disputed and do not require any other action. Fannie Mae needs them removed and new credits run.
When you have large deposits, multiple cash deposits, transfers, etc.: choose Freddie Mac. Why? Only Freddie requires the most recent 30 days of assets, giving you ample time to advise your client to stop moving money into the verified account in order to produce a clean transaction history.
Self-employed borrowers: Freddie Mac is your friend. The automated underwriting engine, in most cases, will require only one year of business and personal tax returns. This allows you to use the most recent income figures, reducing the amount of paperwork submitted. (Effective March 6, business entities owned less than five years will require two years of business and personal returns.)
Do you have a spotty employment history? Fannie or Freddie is fine. Conventional does not have the specific employment history requirements that FHA does and therefore allows you the flexibility to structure your borrower’s current situation accordingly. The general rule is: less than six-month job gap, three to six months at current employer. Over six-month job gap, minimum six months at current employer.
When you have 100 percent gift funds for down payment and closing costs on a primary residence: go Fannie Mae, Freddie or FHA.
Donor’s ability (donor—the person who gives you a gift of cash to buy a home): If the donor does not wish to provide a 30-day bank statement of their assets to source the gift, go conventional only. With proof of deposit in the borrower’s account and a signed gift letter, the ability of the donor has been met.
Does the home have peeling paint or small, deferred maintenance? Do not go FHA. FHA requires peeling paint and any type of deferred maintenance to be repaired prior to closing. Conventional does not.
(Updated) Condos with deed restrictions and minor litigation: go Fannie Mae or Freddie Mac. Fannie and now Freddie allow for many types of deed restrictions and are OK with minor, non-structural litigation. (Example: slip and falls or unit owners suing each other.)
Minimal credit profile: go conventional.
Minimal income but large assets: go conventional. The Asset Depletion program works great as a form of supplemental income by taking a percentage of employment-based assets, like a large 401 K, using a percentage of the balance and dividing it by 360 months to come up with a monthly figure to qualify. (Effective March 6, Freddie Mac increased the LTV of this program from 70 percent to 80 percent.)
Use of business funds for down payment: go FHA only. FHA does not have any issues with business funds. Conventional requires three months of the borrower’s business assets and the underwriter must do an analysis of the deposits; if it is determined the business is insolvent as a result of the use of those funds, those funds cannot be used for the transaction.
Use of departing rental from current primary residence: go conventional. FHA now has a 100-mile minimum rule and requires 25 percent equity in the departing residence for the use of any type of departing rental income when converting from a primary to investment property.
A second lien acquired after the purchase of subject property with minimal equity: Go FHA. FHA is the only agency that will consider the transaction rate/term (not cash-out, which may affect the rate and limit the amount of loan you can borrow) if the second lien has not been used in the most recent 12 months. Max LTV is 97 percent, compared to conventional cash-out limitations of 80 percent.
If your debt-to-income ratio (DTI) calculation is high and an auto lease has 10 payments remaining: Go FHA only. FHA is the only agency that will omit the auto lease payment as long as automated findings automatically omit it. The lease cannot be paid down to 10 payments, however.
Recent payment arrangement on a judgment: Go FHA only. FHA with only three months of an established payment history will allow you to proceed. The payment must be included into the DTI. Conventional requires the judgment be paid in full prior to closing.
Higher LTV (loan/value) for cash-out: FHA still goes to 85 percent
Do you need to add a borrower, not on title, in order to qualify on cash-out transaction? Go Freddie Mac. Recent guideline updates now allow the adding of borrowers as long as one borrower has been on title for a minimum of six months.
Unpaid collections and unpaid charge-offs: Depends on the amount. Fannie Mae does not require anything to be paid regardless of the amount when it’s a one-unit primary residence only. Two to four units primary requires payment when total amount exceeds $5,000. FHA requires collections and charge-offs paid when the total amount of them equals $2,000 or more
Recent Chapter 13 discharge: Go FHA. With only 12 months’ history or discharge, you may proceed. However, it will be downgraded to a manual underwrite because it’s less than two years discharged. Additional conditions will apply
Recent receipt of alimony or child support income: Go FHA. With only three months of payment history and a final divorce decree matching the amount of payment, FHA will accept it. Conventional requires six months of payment history.
Maximum grossed up on non-taxable income allowed: Go conventional. Fannie and Freddie both allow up to 125 percent of the indicated benefit amount, where FHA only allows up to 115 percent.
Limited review needed on condo due to under reserved development: Fannie and now Freddie Mac both go up to 90 percent LTV on primary occupied condos
Well and septic are less than 50 feet from each other: Go conventional. Conventional will accept the local municipal authority’s requirements
Legal non-conforming zoning: Go Freddie Mac. Freddie Mac only requires the appraiser to comment that it does not affect marketability. Rebuild language not required.
Borrower has a part-time or secondary job for less than two years but more than 12 months: Conventional allows a minimum of 12 months as stable as long as there is an expectation that the secondary job will continue. FHA requires a two-year minimum history in order for it to be used.
Recently modified mortgage: Go conventional. Conventional has no seasoning on a modified mortgage but does require a clean 24-month history. FHA requires a clean 12-month history of the modified payment and a copy of the modification documentation.
(Updated) Condos with high investor concentration: Fannie Mae only. As long as the subject unit’s occupancy is for primary or secondary residence purposes it is acceptable. When the subject unit is for investment purposes, the primary occupancy for the development then becomes 51 percent.
(NEW) Buying out a spouse or co-owner of a property: Go Freddie Mac. Freddie does not consider this cash-out if both the borrower and the co-owner have jointly owned the property for at least 12 months and they both jointly lived in the property for that time. Needs written agreement of the terms of the buy-out and transfer of the ownership and signed by all parties.
Now you just may know more than your mortgage advisor, LOL.
By Carl Guzman
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp., a Zillow five-star lender http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential and reverse mortgage financing expert and a dealmaker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation, and his advice will save you thousands! www.greenbackcapital.com [email protected]