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When I purchased my home, we actually had a hold up right before closing do to the 2106 business expenses. We had a USDA loan and while my lender didn't require my W2's, the USDA did. When we provided the tax returns, the USDA signed off and we were ready to close the next day, but then the banks underwriters had to look through my W2's since they were now part of the packet. Lo and behold I had claimed some minor (less than $1k) unreimbursed expenses each year for the past couple years. Well, this changed my ratio ever so slightly and required re-submittal to the USDA for re-approval in light of the ratio change. This ended dealying my closing by a day and resulted in some very pissed off sellers.
So, as far as underwriters accounting for that it isn't a universal, but the government programs definitely require the W2's and once they are part of your file, they need to be considered.
In your scenario I would not use FHA at all, as you have 20% down and the added expenses are not worth it. However, you may have been steered in that direction as your ratios are very high given the income and the amount of house you want to buy. Your lender probably felt they had a better chance getting the higher ratios through FHA then they did getting them through conventional.
Didn't bother reading through everything but he's keeping FHA because the allowable DTI is typically much higher than with conventional. So regardless of your increased costs/pmt he had a better chance of getting you approved and him making more money on the loan from higher loan amount and higher costs.
Thanks for your insight into this. It makes sense why he suggested the FHA loan....
I guess lenders haven't learned much if they are willing to loan to a person buying a home that costs over six times their annual salary.
It would be 5 times my salary, since the down payment will be approximately 51,000. I can certainly understand where you are coming from and I would agree that it would be stretching a bit based on my salary. But I did some budget forecasting based on my 39k salary for the next several years.
In the longer term of more than 5 years, I do feel that everything will pay off when the local economy see an increase in rent, salary, and home values. If all else fails, I can always rent out the entire house since since the going rate is at least 1500 a month in this neighborhood.
When I purchased my home, we actually had a hold up right before closing do to the 2106 business expenses. We had a USDA loan and while my lender didn't require my W2's, the USDA did. When we provided the tax returns, the USDA signed off and we were ready to close the next day, but then the banks underwriters had to look through my W2's since they were now part of the packet. Lo and behold I had claimed some minor (less than $1k) unreimbursed expenses each year for the past couple years. Well, this changed my ratio ever so slightly and required re-submittal to the USDA for re-approval in light of the ratio change. This ended dealying my closing by a day and resulted in some very pissed off sellers.
So, as far as underwriters accounting for that it isn't a universal, but the government programs definitely require the W2's and once they are part of your file, they need to be considered.
In your scenario I would not use FHA at all, as you have 20% down and the added expenses are not worth it. However, you may have been steered in that direction as your ratios are very high given the income and the amount of house you want to buy. Your lender probably felt they had a better chance getting the higher ratios through FHA then they did getting them through conventional.
I'm actually a little curious about the underwriting process. It was my understanding that Wells Fargo underwriting process is through the automated system where they just read the numbers before designating each application as pass or fail. Where does the government fall in into this when a conventional loan is involved?
I'm actually a little curious about the underwriting process. It was my understanding that Wells Fargo underwriting process is through the automated system where they just read the numbers before designating each application as pass or fail. Where does the government fall in into this when a conventional loan is involved?
All of the major banks and lenders use an automated underwriting system, but this is only the first step. Generally your information is passed through the AUS (automated underwriting system) to determine pre-approval status and the amount you qualify for. How good the AUS is is dependent upon how honest you were when you gave the information and how much documentation you provided to the loan officer/broker.
Once you go under contract your loan is passed to a processor who prepares all the documentation, orders appraisal of the house, etc. for the underwriter.
When all of the documentation is together, it is sent to an underwriter who reviews all of the material and is the person who actually approves or disapproves the loan. Remember, the AUS is just a computer, all loans are still approved by people and just because the computer said OK, it does not mean the underwriter will agree.
If you are going with a government program the underwriter needs to consider the guidelines set forth by the government agency when underwriting your loan. Some government programs even require that their personnel also review the loan prior to approving it.
In the conventional world, there are no government guidelines to consider, so it is just the banks internal underwriters following internal bank policy. Of course, there are basic laws that must be followed, but the decision as to whether or not you get a loan is entirely up to the banks own policies.
You also need to remember that nothing is guaranteed until you recieve the "clear to close" and even then nothing is really final until the packet is delivered, signed and the loan funded. Up to that moment the decision of giving you the loan can be revoked at anytime.
And to confuse everything, just because you get an AUS (automated underwriting system) DU (desktop underwriting) approval, it doesn't mean there aren't any "overlays" or additional requirements the lender has added to the government (VA/FHA) guidelines.
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In the conventional world, there are no government guidelines to consider, so it is just the banks internal underwriters following internal bank policy. Of course, there are basic laws that must be followed, but the decision as to whether or not you get a loan is entirely up to the banks own policies.
I have to disagree with this statement. The majority of conventional loans must meet more than internal guidelines. Fannie Mae guidelines are followed with two sets of distinct guidelines: one for loans up to 417K and another for loans between $417,001 to $729,750. Lenders/investors (where the loan is going to) may add their own overlays (such as buyer cannot own more than 4 homes with a mortgage, where Fannie allows up to 10 homes). If an investor has their own overlay, many lenders have what is called "Fannie Direct." Fannie Direct is huge in my world, because if we get the DU approval, it can go direct regardless of ratios or other overlays.
As for going FHA vs. conventional, it could mean the difference of getting a loan or not. I have a coule putting down a very large down payment (over 100K and well over 20%). But the ratios for a conventional loan will not go as high as we need, even though they could pay cash for the house. Absolutes no longer exist in this business. Each case requires it's own individual recommendation.
Good information. When we started our house hunting, we looked our our budget, debts and income and determined that we could comfortably afford a $180,000 house. That's what we requested for a pre-qual letter. Both lenders I spoke with told us we could easily pre-qual for more than twice that amount. With the mortgage payment on a $375K house, we would be slaves to our home. We would be paying only the minimum on our other debts, not be able to take vacations, have great difficulty paying for any repairs, not have money to contribute to savings or retirement plans, etc. My husband makes $82,000 yearly, but if he were laid off from his job, we would likely face foreclosure on a house that expensive.
With a $180,000 home, we'll be able to pay $100 extra on the mortgage every month, pay off our couple of credit cards in less than a year, continues contributing to our savings and retirement plans, have money for upkeep and repairs, and even have extra money for life's little luxuries, such as a weekend mini-vacation. If husband is laid off, we'll have money in savings and could even tap into our retirement accounts to tide us over.
It just makes you realize how things went so wrong. Don't max yourself out for a house you can't really afford, even if you can find a lender that will let you do it.
You were the lucky one - Debt ratios were low enough to endure.
At the end of the mortgage loan approval process EVERY investor pulls tax transcripts directly from the IRS (Did you sign the 4506-T, yes you did - if you applied for a loan in the last four years). These transcripts are an exact duplicate of what you filed with the IRS. When unreimbursed business expenses show up on the IRS transcript, the file goes back into underwriting and the amount of unreumbursed business expenses averaged over two years comes right off your qualifying income. If a loan officer tells you that you can get around this, especially on a purchase transaction, they are careless and reckless.
Tax returns are almost always required for loan approval. And in the event that they are not (not required by automated underwriting) the loan officer owes it to you to review your last two years returns. Because...if you are being qualified with $80K of income, but show $12K of unreimbursed business expenses on your return...your income is $68K. You can go all the way through underwriting, get the conditional loan approval and once those IRS transcripts come back to the investor and they see unreimbursed business expenses, the file must go back to underwriting and have the income re-calculated. If your debt ratios are close with the $80K of income, you will be denied due to excessive debt ratios.
Your employer has no ability to determine whether or not you will claim unreimbursed business expenses, so they will not be able to provide any documentation to the contrary(do they know you are not writing off your work clothes purchases, dry cleaning, subscriptions to work publications, etc. - NO, so how could they put in writing that you will not claim the expenses?)
Be careful and make sure you are with a TRUSTED professional!
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You were the lucky one - Debt ratios were low enough to endure.
