Rob Dawg brought up how discriminatory the underwriting guideline is for those who use interest/dividend income to qualify – they have to prove that the income will extend three years into the future. Yet those homebuyers on salary or hourly pay don’t have to make any such assertion, and they could get fired the next day after closing.
There are other underwriting guidelines that make you scratch your head too. Here are some examples:
1. ‘Gift’ for down payment – The previous standard was that as long as your down payment was at least 20% of the purchase price, the entire amount could be a gift. But now the Fannie/Freddie automated underwriting is allowing 10% down payments to be all-gift too. Is that really ‘skin in the game’? Sellers can still pay all buyer closing costs too.
2. Reserves – If you are buying a rental property, you have to use at least a 20% down payment (25% on 2-4 units), AND have at least six months’ worth of payments in the bank at closing – which includes your PITI payments on current residence and the new rental property. It makes sense too – you could get hit with a quick vacancy, and the bank would want you to have ample reserves.
However, when buying a residence as an owner-occupier, the required reserves are much less. The guideline states that the buyer should have two months’ worth of payments in the bank – which isn’t much – and a lender told me he has been closing FHA/VA loans recently with less than one payment’s worth of dough left in the bank!
3. Appraisals – With the new rules that isolate appraisers from influencing agents, you’d think the inflated-appraisal problem would be solved. But they still give appraisers the actual sales price and tell them to hit it, which takes out some of the objectivity. Even so, today’s article (LINK – hat tip T&W) included this quote, “If you thought what was happening before was an embarrassment, wait until the second time around”.
Think of these questionable guidelines when you hear how the ‘tight credit’ is mucking up the market!