First Time Home Buyer Seminar With Kenton Brown 11
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Transcript:
Kenn Renner:
Alright, I’m going to bring up Kenton again to talk about the pre-approval and approval process and some secrets.
Kenton Brown:
Thanks Kenn. Alright, here again, we wanted to dispel some of the mythology associated with getting a loan, so we’re here to tell you the truth of the way this thing really works. First of all, there are certain criteria that we look at, and the first criterion is income. The days of not having income are over. If you don’t have a job, you can’t get a loan. There are certain situations where it could happen, like if they have $5 million in the bank, which makes sense. The reality is that the secondary market has no appetite for no-income loans. You still need to go over their review. On a W-2’d employee, typically you look at gross income. Some people think that they’re pre-approved for a loan just cause some website told them that they were. Well, that’s not true. We’d ask, “Did they look at your income?” And you might say “well, no, it was just quick in 5 minutes.” Sometimes people’s income might be a base amount and they get a commission amount and do they have a history of that? Self employed people; we look at their net income. This is a little bit trickier because they might think that they get $100,000 per year based on their tax return, but when we look at them, we find out that they have a really creative CPA and they only made $10,000 per year. So there’s a pre-underwriting process and typically what we’ll do on the front end is ask if the income some one presents us with is all base or if it’s guaranteed. If you get over-time, is the over-time guaranteed or do you have a history of it? We start looking at the two-year history of a lot of different things. With a self-employed individual, we typically get the most recent two years of tax returns. There are certain things we can also account for such as depreciation and paper losses and those are where it gets a little bit creative sometimes. Kenn says that the secret is to buy the home before you go self-employed. There’s this guy I’m working with right now who’s been working 29 years at his job. He’s got awesome credit and plenty of assets. Six months ago he decided to go contract. Oh, that means he’s paid by 1099. Oh, that means he’s self-employed. Oh, that means he doesn’t fit in the box. I actually found a banker who’s willing to help him out. There are certain ways to help you out, but just bear in mind that there’s certain documentation that we’ll look at when we’re trying to determine if you qualify for a loan.
The second thing we look at is liabilities. Here again, there’s a lot of mythology around this. Typically what we look at is what we call debt ratios. If you take your proposed house payment and combine that with all other liabilities such as credit card revolving debt, car payments, student loans, then you are left with your debt ratio. This is where the loan can get really out of whack because for a while, because the machine could make a mistake that a human underwriter would never make. One lady I knew with a big retirement account got approved by the machine for a loan even though her liabilities were out of whack. I called her up a year into the mortgage to see how things were going and she said she was in foreclosure. Did I help her? No. So if somebody’s debt ratio was 60-70%, the machine was approving them. I thought, “how does that work in the real world?” If 60 or 70% of your income is going towards your house and all your liabilities, how do you eat and live and go to the movies? Typically the way we look at debt ratio now is that you don’t want your liabilities and your house payments to exceed 45% of your gross income (or net income if you’re self-employed). There’s certain cases where an automated machine might approve some one with 50%. I look at those with prudence. For example, do they have cash reserves? If something bad happens to this person, will they be able to keep making the payments? Everybody knows that there will be breakdowns that happen in all of our lives that they’re not expecting and they need to be able to have cash reserves to pay for them. Budgeting. That’s not something they teach you in school. Some people say they’re not good with math. I say you better get good at math. Because you need to take care of yourself. The reality is the government is not going to take care of you when you get old so you have to take care of yourself. That’s a completely different subject, but we look at the prudence associated with the loan and ask, “How does this work in the real world with a real cash flow situation?” Now, if you know you’re going to need a car, make sure that you buy the house before you buy the car. I had a lady who was pre-approved for a loan and then she went out and bought a bunch of furniture for the new home. Then she came back later and I said, “You don’t qualify for the home any more.” That’s an unfortunate situation. Sometimes, if you know you’re going to need a car, the loan won’t go through if you’re making car payments.