by Wendy McPherson
It was just five years ago that I learned that Michael, my favorite waiter at my favorite local Mexican restaurant, had bought his first house. I was thrilled for him! Worried but thrilled. How could he have bought a house on an income of approximately $30,000 a year? How could he make the payments?
Fast forward two years. The next time I was in the restaurant Michael pulled me aside and his problems spilled out. His cousins had moved out and stopped paying him rent for the other bedroom in his house, then the roof started to leak and he had to get it fixed, then he kept getting bills from the county for property taxes and on and on. He had not been able to make his house payments for three months and was getting letters from his bank that said they were going to take his house.
Michael was able to get a loan five years ago by opting for a "stated income loan." A stated income loan is a mortgage where the lender does not verify the borrower's income by looking at the pay stubs, W-2 (employee income) forms, income-tax returns or other records. Instead, borrowers are simply asked to state their income and taken at their word. These loans do not exist anymore.
Fast forward again to today's lending market. The qualification issues for borrowers have swung to the opposite end of the spectrum. Applying for a loan now can feel like a complete invasion of privacy and requires the utmost patience on the part of the borrower, the owner of the house he is trying to buy and the agents who represent the buyer and seller. Most buyers now have already obtained a pre-approval letter from their bank or mortgage company prior to making an offer on a house. These letters are mandatory for buying a house on the Peninsula and should be given to the seller along with an offer to buy the property. However, these letters guarantee nothing. Banks are not bound by these letters thus buyers should be very careful when deciding to move forward on their purchases.
If your earnings are reported on a 1099, you need to be extra patient and know that the process will take longer than if your income is reported on a W-2. Issues that are important to the bank are such things as: how long you have been in your job, are your bonuses consistent and can you verify the source of funds for every deposit in all your accounts. In addition to this standard type of review, you may be asked the following: Will your employer write a letter stating that you are an employee in good standing and will continue to be in your same job for the foreseeable future; will your parents who have given you some money write a letter verifying that the money is a gift and does not have to be paid back; please write us a letter stating that the refrigerator and washer dryer that are included in the sale have no value (as the bank doesn't want to loan on personal property); the statements you gave us that you printed off the Internet are not in a format that we will accept; in year 2005 you had a late payment to Macy's — please explain that.
It seems that that old saw about the only people who can borrow money are the ones who don't need to may be truer than we think. Borrowers must be prepared to be asked almost anything by these lending institutions — and asked the same question a number of times.