Every once in a while we come across unique laws, lending programs, or bank policies that give our clients some unique advantages in real estate. This is obviously no substitute for solid due diligence, planning, and analysis. However, these loopholes can give you a leg up and might even open some possibilities.

The Problem
As you might be aware, the lending industry has undergone some very significant changes in the last few months. In particular, many stated income programs have either been eliminated or the cost of such programs has increased dramatically. In some cases, these programs were rife with abuse, but they were also invaluable to those who are self-employed, where tax returns may not always reflect the ability to make payments. They are also invaluable to many first-time homebuyers who may have roommates to help with payments as roommate income can rarely be used for qualifying.

The Solution
Many lenders have introduced unique programs for high credit applicants that forego tax returns, paystubs, W2s, or 1099s. Sometimes asset documentation such as bank statements or deposit verifications can be waived as well. However, the loan is treated as a typical loan where documentation is required. This means the same rates and terms as traditional “fully documented” loans.

These programs do have some special requirements. In addition to high credit scores (most minimums range from 680 to 720), these programs are usually restricted to conforming loan amounts ($417k for single family homes as of 9/11/07). Lastly, nearly all of these programs are not available for $0 down purchases (but many are available for 5% down). But if you meet the requirements, the savings could be substantial.

Real Examples
Magdalena – Self-Employed Jewelry Maker – 710 Credit Score
Magdalena wants to purchase her first home, a $350,000 condo, and has about $25,000 from savings and a gift from her parents. Her tax strategy has been to minimize taxes, not show income for home loan qualifying. Consequently, on paper, she does not make enough to qualify. Here's an example to show the savings of one of these special programs versus a stated income loan if she makes a 5% downpayment, and takes out a 5/1 interest-only loan:

Roman – Electrical Engineer – 694 Credit Score
Roman has an ARM loan that will adjust soon and he needs to refinance. Fortunately, his house is now worth $600,000 – a bit higher than the $400,000 he paid for it nearly 5 years ago. Unfortunately, Roman began working for a startup and receives some of his income in the form of company equity, which can't be used for qualifying. Let's assume he wants a new 10/1 interest-only loan for $400,000:

Implications
This is boon for those who are self-employed and whose only other option would be a traditional, stated income loan. This may make homeownership affordable for scores of buyers who planned on having roommates to help make the payments. This may also affect borrower strategy. Many of these programs are only applicable to conforming loan amounts, which may mean that a property that only costs a few thousand more in purchase price could end up costing hundreds more per month if it necessitates a jumbo loan. This is where it can really pay to do the homework and develop a plan.

Every situation is different. As always, we invite you to contact us directly for information on your particular situation.