Daily News And Advice
Don’t Get Paid Once Per Month? How Lenders Calculate Qualifying Income
Lenders want to make sure you can afford the new monthly payments that come with a new mortgage. Makes sense, right? Well, not only does it make sense but so-called ‘Ability to Repay’ or ATR determinations are the requirement of most every residential mortgage made in today’s environment. Lenders make that determination by comparing gross monthly income with the new mortgage payment, which includes taxes, insurance and private mortgage insurance when required. The key word here is ‘monthly.’
Lenders reviewing someone who gets paid on the 1st of each month have it pretty easy. There’s one paycheck issued each month, hence the ‘monthly’ requirement is satisfied. So too are those who get paid on the 1st and 15th. The lender will ask for copies of recent paycheck stubs to third-party verify gross monthly income. The paycheck stub will clearly show the amount of gross monthly income along with year-to-date totals. The paycheck stub will also show various deductions, but those deductions have little to do with calculating qualifying income. It’s income that’s the concern, not deductions.
Bonus income may also be used but it too must follow certain rules. Bonus income must have at least a two-year history of being both consistent and disbursed. There’s a little twist here though. If there is only one bonus issued, such as an annual merit bonus, it won’t be used to help calculate qualifying income. Why not? Because a bonus issued in December probably won’t be around next August. It’s been spent. Quarterly bonuses can work as long as there’s the history of receiving it, but a one-time payment or occasional bonus probably can’t be used.
For the self-employed borrower, it’s a bit more involved. Someone that is self-employed can withdraw funds on a particular day or days of the month. This consistency is important to a lender. If someone has been withdrawing a specific amount of funds from the business to be used as income, it’s relatively plain what amounts are used in order to qualify. Most self-employed borrowers don’t set up this arrangement but get paid when a client pays an invoice for products or services provided. In this instance, lenders want to see the previous two years of tax returns and a year-to-date P&L. With this information, those total payments are then averaged over that period. The result is the amount lenders will use to determine affordability.
But there’s another kink for those who receive a paycheck from their employer. What happens when someone gets paid every other week? Getting paid every other Friday for example isn’t the same as getting paid on the 1st and 15th. In this instance, a little more math is needed. Not much more but a couple of additional steps, anyway.
Qualifying income for someone getting paid every other week means 26 paychecks. Since there are 52 weeks in the year and getting paid every other week means 26, right? The paychecks are then reviewed and the total gross income appearing is added up. Then, the total is divided by 12 (months). If each paycheck stubs show gross disbursement of say $3,000, the lender multiplies that amount by 26 (weeks) to arrive at a figure of $78,000. Finally, that amount is divided by 12. The result is $6,500 per month.
Your loan officer will help you calculate qualifying income if you get paid every other week, it’s really not hard. But for those trying to calculate their income on their own and they use $6,000 for qualifying income (two checks per month) they’ll be short-changing themselves.
What is a Title Search?
When you’re buying a house, it’s often one of the most exciting times in your life. It can also be stressful and overwhelming because there are a lot of steps in the process to get to the closing.
One of those steps is called a title search.
When you buy a home, you probably inherently think that the seller is entitled to sell the property. That’s not always the case, though. There could be someone else with a claim or a lien on the property you want to buy.
That’s where a property title search is relevant.
What Happens During a Title Search?
If you’re going to buy a home, then a title search is a way to go through public property records and confirm the legal, rightful owner of said property. A title search should also uncover whether or not there are liens or claims on a property that can ultimately affect you buying it.
A property title isn’t the same thing as a deed, nor is it a document.
Instead, the title is a reference to ownership rights as a concept.
A title company or an attorney can do a property title search. They are making sure there’s not another entity or person who could come forward and claim a stake in the home.
If you’re getting financing, then a title search is required. A mortgage lender will make you get one before they fund your loan.
Who Does a Title Search?
As was mentioned, a title loan company can do a title search, or an attorney can do it. Where you’re buying a home plays a role in who ultimately does the search.
Once a contract is signed, then as a buyer, your attorney might order the title search. Then, that attorney could complete it, or they might pass the work onto a title company. The completed report then goes to the seller’s representative. The seller’s representative has to take on the role of managing and dealing with any issues that might arise.
There are a lot of sources of information that might be accessed during a title search, including:
• County land records
• Property plats
• Tax liens at the state and federal level
• Divorce records
• Bankruptcy court records
• Construction liens
When a title search is done, it will also uncover details about mortgages associated with the property.
How Long Does it Take?
A title search might take a few hours, up to a few weeks. The older the home that you want to buy, usually the longer the title search will be because there might have been multiple owners and transactions that involved the property.
What If There Are Issues?
Some of the common issues that can come up during a title search include:
• A break of chain in the title: In this scenario, there might be a missing deed in the chain. This is common in older homes.
• An improper description on the deed: There might be an improper or missing description on a deed, and that would require obtaining a corrected deed.
• Missing interests: If there’s a transfer via an estate in a title chain, then any heirs must have relinquished their interest in the property. If they haven’t, then you have to get deeds from the parties with an interest to release it.
• Liens: This is a legal claim or right on a property often used as a way to get repayment for a debt. Title searches can show if there’s a lien on a property and whether or not it might be expired or could be something requiring payment.
The big takeaway with a title search is that it’s one important component of the process of buying a home. If you have questions about what happens during a title search or the results, you should speak to your Realtor or your attorney.
If you don’t discover something like a judgment or lien before you close on a home, it could be expensive and stressful to deal with the situation later on. For example, if there’s a judgment against a home and you end up buying it, it can become your obligation.
Here’s What to Know Before You Buy a House with a Pool
If you’re in the market for a new home, you might think a pool sounds like a great idea. Pools are in high demand right now—so much so that pool contractors have waiting lists and there’s a shortage of maintenance items like chlorine.
Is pool ownership all it’s cracked up to be? It can be, but you need to be prepared.
What Are the Pros of Having a Pool?
We’ll cover some of the perks of a home with a pool before getting into the downsides.
It May Improve Your Quality of Life
A pool can be a lot of fun, and having one at home can improve your quality of life. You might use it for exercising, and it gives you a good excuse to get outside more and take in vitamin D and fresh air.
Many families with pools find that they enjoy time together, and you might be able to build your social life around having it.
A Pool Can be Beautiful
When you buy a home with a pool, it might be something you enjoy aesthetically. It’s a lot of fun to look outside and see your pool or have a view of the water from your deck. For many people, the view of water in any form, including a pool, is relaxing.
Pools Can Increase Your Home’s Value
There are a lot of instances where having a pool can increase the value of your home. This is especially true if you live somewhere with a warm climate. In places like Arizona and Florida, having a pool is practically seen as a necessity.
If you have a pool and your neighbors don’t and you ever want to sell, your property might be more in-demand or get more money than a nearby home without one.
What Are the Cons of Having a Pool?
Even if you’re excited about the potential of having a pool at home, there are some possible downsides you need to be well aware of.
Are You Ready for the Cleaning and Maintenance?
Some people actually like cleaning and maintaining their pool, but if you don’t think you’re going to be one of those people, rethink buying a home with one. It can take several hours a week if you’re going to maintain your pool yourself.
If you hire a pool service company, plan to spend anywhere from $50 to $150 a week.
Along with the work required to clean and maintain a pool, you also have to pay for the supplies.
If you buy a house with a pool, you have to make sure it meets existing codes and safety requirements. You might end up having to install a new fence or alarm.
If you have children or pets, you also want to think about safety and how having a pool could affect your family in that regard.
Your Insurance Costs May Go Up
Your homeowner’s insurance will usually cover a pool as part of “other structures” in your policy. However, you could be held liable if someone is injured in a situation relating to your pool. Sometimes, because of that, a pool is referred to as an “attractive nuisance” in an insurance policy. That means you’ll need liability coverage, and this could increase your insurance rates.
It Might Not Always Be a Good Thing for Resale
Another consideration is the fact that a pool might not always be a plus in the eyes of prospective buyers. It could actually end up limiting you if you wanted to sell your home.
Finally, what condition is the pool in if you’re buying an existing home? Is there a chance that when you move in, you might have to pay for major repairs or upgrades?
Whether or not a pool is right for you is a personal decision, and it’s one you need to think about strategically rather than emotionally.
Buying and Financing Investment Real Estate With Friends and Family
A lot has been made about crowdfunding lately. It’s a way for individual investors or buyers to pool funds with others in order to finance whatever it is they want to finance. With real estate, it’s also an opportunity to pool funds and financing together to invest with the assistance of others instead of flying solo on a particular project.
When buying and financing a property individually, the buyer assumes every single bit of risk associated with the purchase. The buyer must vet a potential renter by performing basic background checks. Tenants must provide copies of recent paycheck stubs and contact information for their employer.
Certainly, determining whether or not the potential tenants can afford the rent payments is an essential task. Bank statements should be reviewed to make sure what the prospect says he or she makes is reflected as deposits in a bank statement. Credit is reviewed. Rent is collected each and every month. Late payments must be tracked down. There are maintenance issues involved. When the hot water heater goes out, it’s the owner of the property that must stop and take care of the issue.
And, as it relates to financing the purchase, the buyer must qualify for a rental loan. If it’s the first rental being purchased, the buyer must qualify without the benefit of the rental income generated from the unit. There’s certainly a lot to consider before making such a move. But when buying with others, the risk is associated with all parties on the note. It can also mean making a larger purchase instead of a three bedroom single family home. Apartment buildings come to mind.
When pooling investment funds together with others, lenders will treat everyone involved the very same. Everyone’s income must be verified. That’s relatively easy to accomplish but instead of reviewing one paycheck stub and one suite of bank statements, everyone involved must provide the same amount of paperwork. This will be a bit more complicated when there are four investors buying together instead of just one. It’s relatively easy to add up the income but there is also the situation of reviewing everyone’s monthly credit obligations. All income and all bills are lumped together to arrive at a single set of debt ratios.
Further, credit must be reviewed individually. In such a situation, if four people are buying together, it takes just one of the buyers to have less than stellar credit scores. For instance, three buyers have credit scores of 745, 776 and 750. But the fourth buyer has a representative credit score of 590. Guess which score the lender will use when reviewing the application? That’s right, the 590. The higher credit scores of the other three can’t overcome the 590 and no, they’re not averaged together. In this situation if the transaction is to move forward, the fourth buyer will have to be removed from the contract.
When buying together and financing will be sought, all parties must be prepared to show to everyone their income, asset and credit histories so there won’t be any surprises. Buying with others increases leverage, but care should be taken that everyone involved is financially stable to take on the new project.
What Should You Know About Homeowners Associations?
If you’re thinking about moving, there are a lot of factors to consider aside from the house itself.
Homeowners associations are one example. Living in a community with a homeowners association can have its benefits but also its downsides.
It’s important to be well-aware of the implications of living in a community with a homeowners association before you make an offer on a house.
The Basics: What Is An HOA?
An HOA is a governing body in a community, and you’ll
Ask the HOA Expert: Illegal Or Unapproved Modifications
Question: Our board is concerned about some of the structural changes made by owners like cutting concrete foundations, moving walls and plumbing modifications that tie into the main lines. Is there a statute of limitations to bring action against an owner for illegal or unapproved modifications?
Answer: Every HOA needs a policy for architectural changes. That policy should require proper engineering and permitting. If your HOA is comprised of single family homes, the HOA's concern is
What Does a Real Estate Attorney Do?
A real estate attorney may or may not need to be part of your home buying or selling process, but how do you know?
Having an understanding of what they do and their specific role can help you understand if this is someone you need on your team.
What Do Real Estate Lawyers Do?
First, what does a real estate lawyer do overall? They handle real estate transactions, but what does that mean?
For buyers, a real estate lawyer might go over the documents related to the
What’s a Kiddie Condo Loan?
It’s that time of year when kids are graduating from college. They’re certainly due their congratulations. I, for example, just attended my third child’s graduation ceremony in Colorado. Since that was my last child to graduate, I essentially got a big raise. But for those parents whose child is getting ready to go to college this next fall, one of the main considerations is where to live.
Many colleges and universities require a freshman to live in campus housing while
What Can You Do If a Contractor Doesn’t Finish the Job?
If you hire someone to do work on your home and they don’t complete that work as agreed upon, it can be incredibly stressful, especially if you already paid them. Whether it’s a small or large project, it’s not as uncommon as you might think for a contractor to skip out on the job. If you’ve tried to contact them and you haven’t gotten a response, you might be sitting not only in an unfinished home, but it can potentially be dangerous.
So what do you do?
|Mortgage Rates |
Averages as of August 2021:
30 yr. fixed: 2.8%
15 yr. fixed: 2.1%
5/1 yr. adj: 2.45%