by Dan Krell
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The MD General Assembly does not literally want to see your money, however you are now required to disclose your income on all mortgage applications.
In an attempt to limit future foreclosures, avoid vacant eyesores in our communities, and spare the taxpayers of future bailouts, the Maryland General Assembly passed a law that requires all mortgage applicants to provide supporting income documentation when applying for a mortgage. In doing so, the state legislature has basically eliminated all stated income and “no-doc” loans; which are popular with self employed individuals.
Maryland is not the first state to eliminate these low documentation loans; Maryland joins Minnesota, North Carolina, and Illinois to require borrower income documentation for all mortgages. Stay tuned, other states will soon follow the trend.
Several weeks have passed since the implementation of Maryland HB 363 (aka Senate Bill 270), however the only mention of the new legislation comes from bloggers who complain that the income documentation portion of the law is unfair to the self employed. Many mortgage professionals feel that the across the board income requirement is an overreaction, and that such requirements are unnecessary as mortgage lenders have already changed their underwriting guidelines.
For those of you unfamiliar with the new legislation, here is brief synopsis of the entire law (which you can view at mils.state.md.us): Lenders are prohibited from charging prepayment penalties for mortgages; the Commissioner of Financial Regulation is to set mortgage lender licensing fees and examination requirements; expands the licensing requirements for mortgage lenders and mortgage originators; and lenders are to verify a borrower’s ability to repay a loan.
Unfortunately, there were many home buyers whose homes went to foreclosure because they could not afford the monthly mortgage payment at the time they purchased their home. Many of these foreclosures were “first payment defaults,” meaning they never made their first payment. By making the lender collect supportive income documentation from the borrower, the lender is now accountable for ensuring the borrower can afford the mortgage (by meeting debt to income guidelines).
If you are self employed, you may know that fully documented your income is much more complex than just providing a W-2 – but it can be done. Lenders are now required to collect third party documentation to support income (W-2/1099; income tax returns; payroll receipts; financial records; OR other third–party documents that provide reasonably reliable evidence of the borrower’s income or assets). In other words, “Show us where the money is coming from to pay the mortgage.”
Critics claim that self employed home buyers are penalized because they cannot provide the documentation to support their income. These critical claims that self employed home buyers have the income to support a mortgage payment but cannot provide documentation is suspect; it may suggest that the home buyer is not reporting their income (which is an entirely different matter), or is claiming that the amount that they deduct as legitimate business expenses will be used for paying their mortgage (which is also a different matter). I am not an accountant, but the critics’ logic against such legislation does not stand up.
If you are self employed and worried about obtaining a mortgage, don’t worry. Many mortgage options exist; and although not as prevalent, stated income loans are still available – but you should be prepared to present documentation to support your income.
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 23, 2008. Copyright © 2008 Dan Krell.