Seller Financed vs Stated Income Mortgages
by T. Ford from Bristol
Ask Kate about seller financed vs stated income mortgages: Hello there, I've been doing cash-in-hand work for the past three years. I'm going to continue to do so. I have all the savings in place for a mortgage. How would you suggest I go about applying for a mortgage?
With regards to proving my finances and getting approval, I can't really explain where the cash came from - due to being paid cash. Many thanks, T. Ford
Kate Answers: Seller Financed vs Stated Income Mortgages
Dear T. Ford,
Jumping through the hoops of getting a mortgage is about alleviating a lender's fear over losing its investment.
Understanding that this fear is the hub around which the mortgage approval process revolves, it makes it easier to identify challenges and work through
the traditional mortgage process.
Or you could just go around
or even outside
the plain-vanilla process, which I think will be the case for you. More on this in a moment.
Traditional Mortgage Approval a la Vanilla
Traditional mortgage approval, sometimes called credit approval, is like a hat-rack with 4 pegs. The underwriter (individual at the mortgage company responsible for giving official thumbs up or down) wants to know on which peg they can hang their hat (your loan approval).
For the most part, you will be reduced to a pile of paperwork to be divided between the 4 pegs:
- Peg 1: Verifiable, sufficient, and ongoing income.
- Peg 2: Verifiable job history of sufficient length.
- Peg 3: Verifiable and sufficient down payment and cash reserves.
- Peg 4: Verifiable and acceptable credit history.
Jumping THROUGH Traditional Mortgage Hoops
Using these four categories, all kinds of qualifying criteria, absolutely intriguing to a lender, is extracted as the basis to approve or decline a mortgage.
Prior to the last few years, if 1 peg was of sufficient strength, the other 3 could be weaker. But since the rise and subsequent fall of the real estate empire, mortgage companies are overly-obsessed with 4 strong pegs.
Not to say a home buyer has to be 100 percent squeaky clean but better plan on getting as close as possible.
Working AROUND the Traditional Mortgage System
Re-reading your letter, I see you don't mention your credit history. Hopefully it is excellent, since for you, the lack of data required by pegs 1 to 3 would require a not-much-of-anything-verified type of mortgage product.
So you would apply for (at the very least) one of the stated income mortgages. But these not-much-of-anything-verified mortgage interest rates are going to cost you big time.
In addition, do you recall the emphasis on the 4 pegs? That means lenders' programs of stated income mortgages are few and far between. So I suggest investigating another path for buying a first home.
Going OUTSIDE the Traditional Mortgage System
Remember earlier when I mentioned going outside
the traditional mortgage system instead of through or around? Here's what I meant by that.
Be on the hunt for sellers who can double as your mortgage lender. Many times, their home is paid off and they are seeking a monthly income vs a lump sum of money. If you offer an interest rate higher than earned on their investments, it's a tempting venture to motivated sellers.
Seller Financed Mortgages
While in pursuit of a seller willing to finance their home, you will probably be making a lot of offers. You'll also find the pool of homes from which you have to pick will be reduced. It might even take some time before you connect with a seller in a position and with the desire to act as your lender.
Sidebar: Note this difference between traditional mortgage financing and seller financed mortgages. In general, no money exchanges hands with owner financing. Instead the seller is extending credit to the home buyer, which is repaid in monthly house payments.
For the best success, I recommend using a Realtor
who is experienced in negotiating the purchase and sale of homes involving seller financed mortgages. They can write up the purchase contract, negotiate their commission from the seller, and will have a team of real estate experts
to assist you with creating the financial documents.
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