Edward from Lincoln Nebraska asks Dave Hershman: I am new to originating. I have a couple of general questions that I hope you can answer, as I have not been getting much guidance from my company.
First question: Can an FHA loan be used for a cash-out refinance of an owner-occupied single-family residence?
Second question: I have a self-employed client who wants a cash-out refinance of a SFR non-owner-occupied home. I have used his 3 years of tax returns to come up with his monthly in-come. However, he has a couple of loans or lines of credit he uses for paying his business expenses. On the credit report, the balances of these loans show. The question is, should I consider the monthly payment from the credit report in calculating the DTI or should I assume all these expenses are taken into account within the tax return?
Dave: While I am not an underwriter, I can attempt to answer these more general questions. However, I would caution you to make sure you verify this information with your underwriter or lender before moving forward.
The answer to the FHA question is yes. But the FHA loan must be a full credit qualifying refinance (not streamline)—and the maximum LTV is 80%, though lenders can be more stringent in this regard. The standard was recently moved from 85% to 80%.
There are also seasoning requirements. FHA loans must be six months seasoned before refinancing, plus if the home is not owned for a full year, the lender will use the appraised value or purchase price, whichever is less.
Regarding the second question, if you can show that the expenses paid are also reflected in the business portion of the tax return (Schedule C or Corporate Returns) and therefore would be double counted, you should be able to subtract those payments and therefore lower their DTI.
However, keep in mind that credit card payments on the credit report are usually 5% or less of the balance. This means you are only qualifying the borrower with this minimum payment. So, it is not going to help that much as far as monthly payments. Installment loans are another matter. The key is not double counting.
If you find they are double counted, the next question is whether they can be removed as a debt from the DTI calculation, or added back into the income. Removing from the debt would be more helpful from a calculation standpoint, but most underwriters are likely to add the payment back to the income, unless there is proof that the payments are made directly from business asset accounts. Again, check with your lender or underwriter for their policy.
Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School – the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at email@example.com.