Time in Line of Work for Home Loans.

From an email:

Anyway, my wife and I are about to purchase a place here in the X area and we've been hearing that "a tough loan" line due to the fact that I'm only 10 months into my new small business although I've been profitable the entire time. We're stuck doing No Doc/Stated Income setups - I think you called these "liars' loans" - and the rates are a bit painful.



My wife's scores... at 720 are the lowest we have and mine are (higher).

Well, the good news is that your credit scores place you in the highest band of credit scores. There is no category beginning higher than 720.



The difficulty is that you're running afowl of one of the background rules of the whole loan process. Fannie Mae/Freddie Mac rules limit A paper loans to those with two years in the same exact line of work. With some limitations, a good loan officer can sometimes get it approved for two years with the same employer, if they've been progressing normally within the company. Changing from a W-2 employee to self employed is a change that cannot be approved, at least from the point of view of A paper. A minus and Alt A rules are mostly similar. So you're looking at subprime if you're documenting income. Let's examine A paper documentation levels to see if they're a possibility.



Full Documentation: Requires documenting two years income same line of work. You can't; you've only been self-employed for ten months.



Stated Income: Requires documenting that you've had the same source of income for two years. Nope. Yes, these and NINA loans are often called "Liar's loans" in the business because the lender agrees not to verify your amount of income. That's because loan officers eager to make a commission on a loan where the client really doesn't qualify use these to qualify the client. The qualification standards are there for your protection as well as the lender's. Just because you can use these to qualify doesn't mean it's smart. Locally where I am we have a huge house of cards because loan officers use these to qualify clients for negative amortization loans. Yeah, the temptation to make a commission is there, but am I really serving the client's best interest by securing them a loan they can't really afford where even the payment they can't afford has them owing more money each month? I submit that the answer to this question is usually no. These are designed for self-employed folks and people on commission who make the money, they just have write offs and such so that they can't really document it. Using stated income to say you make money that you don't is a dangerous game. It's likely to result in foreclosure.



NINA: Requires a good credit score. This might be your ticket. On the other hand, you don't state how much of a down payment you have, percentage-wise. A paper NINA requires some equity in the property; I've never seen an actual A paper NINA approved with less than about ten percent equity. On the other hand, these are very easy loans to actually do. It's trying to qualify you for something better that's hard.



On the other hand, if we move down into subprime, the rules aren't set by Fannie and Freddie. There are subprime lenders with one year same line of work programs, and even a few with six month programs. On one hand, they're subprime loans, carrying a higher rate/cost tradeoff just by virtue of that. On the other hand, because you're documenting your income, you get a break for that.



One of the great universal things of the loan business is this: The looser the underwriting standards, the higher the rate, and the tighter the underwriting standards, the lower the rate. If a given lenders underwriting standards are looser, it's rates will be generally higher.



Now, given that you've only been self-employed for ten months, you're not going to have much of a paper trail. There are three possible ways that banks will accept to document income. W-2? Even if you have them, they're no longer applicable. Income tax forms? Given that it's September, counting back ten months leaves you starting the business in November of last year. Even if you had enough monthly income to qualify for that month and a half or two months, the tax forms effectively spread it across all of last year, and that's unlikely to show enough income. The third method of income documentation, unique to subprime, is bank statements. This, you might be able to do. Most subprime lenders have 24 and/or 12 month bank statement programs, and a large number have six month programs as well. The longer you can document for, the better the rate, but better six months than nothing.



Will this get you a better rate, at a better cost (two questions that always go together), than an A paper NINA? The answer to that is on a case by case basis. There is no way to be certain without pricing it around by the full details of your case, but there's a good chance, and you can get 100 percent financing this way.



I will warn you that bank statement programs (often called "EZ doc" or "lite doc") are THE most difficult loans to actually get approved. There are more problems with these than any other loan type. On the other hand, as I've covered elsewhere, if it gets you a better loan, the effort is likely to be worth it. Furthermore, there is a question of whether you qualify for the loan by the bank's standards. Some banks discount the amount of money coming into the account, some do not.



So which is the better alternative for you? I don't know without actually pricing it. I don't know for certain that either can be done for your situation without information like how much income your bank statements show, and how big your loan needs to be, and how much of a down payment you're making. Get a couple of good loan officers working on it in your area, and find out.



And yes, this is a tough loan situation. Both A paper NINA and subprime bank statement programs have their limitations. Failing that, you fall all the way back to subprime NINA, where somebody with your score can get 100 percent financing no worries, but the rates are rough on the pocketbook.

Caveat Emptor

UPDATED here