Christmas Without a Mortgage
My lender declined my client’s mortgage today, four days before Christmas. His existing loan expires on December 31, and this was his last chance to refinance before the lender could commence foreclosure proceedings.
This 70-year old gentleman has no late payments on his credit report. However, a credit card company entered a judgment against him six years ago, and conventional lenders require this to be removed before extending new credit. Unfortunately, he lacks the liquidity to eliminate the judgment, and his age has been an obstacle to finding a job to augment his social security income. Although the private lender liked his story, they would not accept a Debt-To-Income (DTI) ratio over 50%.
Many people rent the other side of their duplex – but the key issue is whether the lender will classify the rent as “boarder” income (100% of which may be used for qualification purposes) or “investment” income (only 75% of which is allowable – to factor in the potential loss of the tenant). The boarder income argument was valid because the building has only one tax parcel number and is still technically his primary residence. But the Underwriter disagreed, and the resulting lower income caused his DTI ratio to exceed the maximum threshold.
In the end, the proposed structure was declined at a lousy time of year. Fortunately, the lender agreed to approve a lower loan amount – and at a better interest rate. My client also has the ability to raise rent, which the tenant knows is below market.
Here’s the Point: A loan may be declined as presented, but it should be incumbent on every lender to offer at least one alternative structure which would allow the loan to work.
Private Non-QM Lenders Have Dropped Their Rates
Most lenders will only extend Qualified Mortgages. A Qualified Mortgage (“QM”) is a kind of loan having more stringent pre-qualification requirements. QM lenders must show the regulators that they have determined, prior to closing, that you, as a borrower, have the ability to repay your mortgage. This is logical, and will continue to be the norm for conservative lenders. Since these conservative lenders in turn have conservative investors who ultimately purchase your mortgage, their investors also want nothing to do with non-QM loans.
But if I lend you money at 6% (say 2% higher than conventional rates because of some additional risk) – there is no doubt that I already have an investor for the loan I just gave you who is willing to pay me, say, 6.5% for the same loan. Why would an investor do that? Because in a large financial market, he too has someone else on the line willing to pay him something more – and so on, and the business is profitable all around.
The old 12-13% “hard money” loans were being advanced to people having unfavorable credit when standard mortgage interest rates were at 5-6%. Now these non-QM lenders have lowered their rates to 6-8%, when today’s 30-year conventional rates have only dropped to about 4%. It’s not a bad deal to pay slightly higher non-QM rates for a brief period until you have satisfied your lender’s seasoning period requirement – and then you can refinance with a conventional mortgage without a prepayment penalty.
Here’s the Point: Interest rates for non-QM loans are a bargain right now. If your loan request was recently declined because of your credit history, there are lots of short and long-term financing opportunities available to you.
Want a Mortgage? It’s Not Enough to Just Confess Your Sins!
Lenders will discover that you had a foreclosure – that you had student loan late fees – that you defaulted on your car loan – that you already sold the asset claimed on your loan application – that you were arrested several years ago – that you neglected to meet your child support obligations, etc.
It either comes out on your credit report or through the lender’s use of fraudguard security checks – or even when they just Google your name. Lenders have these and several other extensive background checks and “Know Your Customer (KYC)” procedures that they carefully follow.
If you don’t immediately disclose your Deed-in-Lieu of Foreclosure, do you really think they will believe you are providing them with all details on everything else for which they ask?
You will generally always need to write a Letter of Explanation (“LOX”) to address collection accounts and disputes/inquiries on your credit report. And what if your explanation is solely factual and not remorseful?
As useless as sentimentality might appear in the finance world, lenders want to look into your consciousness – otherwise they have nothing to support the notion that you will do everything you can to prevent another late mortgage payment or foreclosure. The parties recommending your loan need your cooperation in order to support you – because they only have their reputations if something goes wrong with your loan. If they have to work hard for someone who has been concealing the facts (intentionally or unintentionally), they are likely to move on to the next file.
Here’s the Point: Be upfront with your untoward credit history. If the lender finds out about an unfavorable fact on their own – without you telling them, they’re not likely to (and shouldn’t) extend you a loan.
Tip the Scales in Your Favor: To Ensure Loan Approval
Your lender will eventually sell the loan they advance to you – it’s pretty much a given. They will do everything they can to “check the boxes” prior to approving your loan in order to make sure that either Fannie Mae will buy your loan, or that FHA will insure against the loss of principal.
Let’s say you just squeaked by with a Debt-To-Income Ratio of 43% (maximum percentage allowed under a Qualified Mortgage). Or, maybe your credit score just barely meets the lender’s minimum 620 requirement. Perhaps your income reduced over last year, and you know that the average earnings to support your loan will be tight.
If the decision is too close to call, your loan will be declined – that’s just the way it is today. So here are some discretionary “Compensating Factors” that can help to persuade the underwriter to stamp “approved” on your loan application:
- Avoid “payment shock” – i.e., when your proposed monthly mortgage payments are more than the current rent you pay (make sure you can verify the last 12 cancelled rent checks)
- Maintain 2-3 credit cards paid “as agreed”, at balances that are well below your total authorized amount (and don’t cancel your unused credit cards – the older they are the better)
- Come up with more than the minimum down payment (and demonstrate how you have been able to comfortably save your money – evidencing that you are prudent with your finances)
- Don’t change jobs too much – unless your income improves (especially with commission earnings)
Here’s the Point: Sometimes only one “Compensating Factor” will persuade the underwriter that you are a good credit risk – thereby improving your chances of getting loan approval.
Declined Again? Don’t Give Up!
It’s been two weeks since your lender told you: “Your loan approval is coming any day now”. Guess what – you have a problem!
Yet you were told your credit score is acceptable, your debt-to-income ratio is comfortably below 43%, and your savings will satisfy the down payment, reserve and closing cost requirements…
Well, unfortunately it didn’t register with your lending officer that you are renting the home you are buying, and that in lieu of rent you are paying for utilities and capital improvements (plus you paid cash for almost all of your housing expenses, and do not have much of a checking account paper trail). And, by the way, the landlord is in default with her lender who is about to foreclose on the home you want to purchase! [Yes, this is a real example]
Without proper explanation, the ultimate buyer of your loan (Fannie Mae) would most definitely conclude that you do not have an arm’s length or independent relationship with your landlord. More importantly, this loan will require too much effort for most lenders, especially if you do not have an established working relationship with them.
By: (i) properly and clearly documenting your receipts, (ii) demonstrating the legality and reasonability of your tenancy, (iii) evidencing proof of your residency, and (iv) ensuring you have an adequate letter of explanation acknowledged by yourself and your landlord, you should be able to get the loan – and avoid having to move your family elsewhere.
Here’s the Point: Lenders are always looking to increase their market share – not by compromising their principles, but by prudently underwriting a well-presented and well-documented loan request.
The Art of Investing
I recently had the pleasure of ap
pearing on a radio show entitled “The Art of Investing”, hosted by Art Espinoza. Having known Art for quite some time in the Vero Beach community along the Treasure Coast of Florida, he asked me to discuss what’s happening in the real estate market, who the primary borrowers of real estate capital are, where I see interest rates going, and a variety of other related topics.
Art has been a respected financial advisor and wealth manager for 28 years, and has offices in Vero Beach, Florida and Brookfield, Wisconsin. His show, “The Art of Investing”, is broadcast every Saturday morning at 9:30 am on WAXE 107.9FM and 1370AM, or on iHeart Radio: http://www.iheart.com/live/WAXE-1079-FM-1370-AM-4788/
Art kindly asked me to make regular appearances on his program, and I look forward to sharing real estate industry dialogue and exchanging topical ideas with listeners in the future.
Here’s the Point: Click HERE to listen to our discussion of what’s currently happening in the Florida economy with respect to commercial and residential real estate activity and interest rates.
