Primemax Mortgage Group

      Given the Federal Reserve’s current policy of holding the Fed funds rate at near 0% for the foreseeable future, you might assume mortgage rates will remain at the historically low levels we have seen throughout the COVID-19 pandemic. However, we have seen this before and mortgage rates did move.

The last time the Fed instituted a Zero Interest Rate Policy (ZIRP) was following the Global Financial Crisis lasting a span of seven years from December 2008 to December 2015. In December 2008, the average note rate for 30-year mortgages was 5.14%; when ZIRP ended in December 2015, the par note rate was 3.31%. However, despite a Federal Open Markets Committee target on short-term rates of 0.00% - 0.25%, mortgage rates experienced several violent swings. Rates shot up more than 100 basis points over a short 3-month period, and during another span lasting only 9 weeks, pricing for the lowest-coupon mortgage-backed security (MBS) declined by 800 basis points from 101 to a 93 handle. Note that this activity occurred more than two years before the Fed began tapering off its purchasing of Treasuries and MBS.

Currently, the Fed has indicated it will not raise the Fed funds rate until at least 2023. However, this does not mean mortgage rates will remain in the same range that we’ve seen over the last 10 months. It would not be unusual to see changes of even an entire whole percentage point up, or down, for however long this current policy remains in place.  Therefore maintaining a comprehensive hedge strategy is a must to both benefit and protect your pipeline during these swings. 

1. Tax return transcripts from the IRS: This is to verify that the tax returns provided are the actual ones provided to the lender
2. W2 transcripts: This verifies the W2’s provided are the actual ones
3. Income tax debts owed: If money was owed on the most recent tax return, it could still be a potential outstanding lien or payment
4. Additional business losses: There could be a business that has losses and could reduce the borrower’s total income
5. Tax returns are actually filed: We have had a couple recently where borrowers provided tax returns for previous years that were never filed. This would never work because the tax returns could be change or never even get filed
6. Extra properties that are owned: If the borrower is using a first time buyer product, there can’t be other properties listed or mortgage interest reported. Always disclose property you own
7. Un-reimbursed employee expenses: If a borrower is commissioned income accounting for over 25% and there are un-reimbursed employee expenses written off, it could lower the qualifying income
8. Business expenses paid by the business: Some products require that the tax returns show the debt being written off by the business to exclude the debt from debt ratios
9. Determining nontaxable income: Some sources of income are nontaxable and to gross up the income, it must be shown as non-taxable income on the returns or some cases not shown on the returns if allowed
10. And of course a good thing, trying to find any income that can be counted for the borrower

We get the argument a lot from borrowers that this should not matter but most do not realize the amount of fraud or mistakes that are on tax returns and that is why lenders have to obtain transcripts of tax returns to close a mortgage loan in many circumstances.

So to avoid delays or issues late in the process, it is best to provide all documentation requested at once and up-front.  Then it can be reviewed, accurate income and debt ratios calculated, and have more confidence later in the process.