Michael Kanuka
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Mortgage Tips for Snowbirds

Flying South

Snowbird mortgage rules are the same for anyone looking to finance a vacation home, unless the borrower resides outside the U.S. In the latter case, there are more onerous foreign national mortgage regulations, a higher interest rate would apply, and there are several title, estate planning, legal and tax issues which would need to be carefully considered. Given today’s exchange rate [CAD$1.00 = US$0.76], Canadians would do well to obtain a mortgage from a U.S. lender – preferably one affiliated with their Canadian bank (for relationship, credit history and funds transfer purposes).  

But here are a few thoughts for those who are able to qualify for a conventional mortgage for the purchase of a property in the sunny South:

  1. Whether a condo or single-family home, call it a second or vacation home – not an investment property (rent it later, if necessary) - you can borrow up to 90% of value (vs 85% for a rental) and avoid a risk adjustment charge of 2.125% to 4.125% of the loan amount, depending on your credit score.
  2. Get your credit score to 740. Otherwise, depending on your down payment, another 1.125% to 3.250% risk charge could apply.
  3. Get a reliable pre-qualification letter. You don’t want to find out just before closing that your debt-to-income ratio (including mortgage obligations of all properties owned) exceeds the maximum lender threshold.
  4. Understand the costs, and then budget accordingly. There will likely be unexpected repairs, improvements, HOA/property management fees, travel costs, etc.


Here’s the Point: Snowbirds could save a bundle of money by doing a little homework before financing a Florida home purchase.

The Christmas Bridge

Scrooge and Tiny Tim

One cold and snowy night, Bob Cratchit was wondering how he could purchase a new home for his family by Christmas.  Not just any home, but one that would surely be perfect for Tiny Tim and his wife – a dream come true.

Their current home was fine, but space was cramped now – and the heater and roof would likely need to be replaced within the next few years.

“I could sell my home and use the net proceeds towards the down payment of our new home”, he thought, “but I need more time to get our current home ready for sale.” “And, how can I afford mortgage payments on two homes?”  It didn’t seem possible.

Would his cruel boss, Ebenezer Scrooge, give him a bonus to make this work?  As expected, Cratchit was laughed out of Scrooge’s office.  Discouraged and dejected, Cratchit gave up.

But Scrooge, after being visited that night by Christmas ghosts, miraculously agreed the next day to simultaneously lend Cratchit two loans: 75% and 80% of the values of his current and dream home, respectively!  Cratchit, having just a 680 credit score, could now use Scrooge’s Bridge Loan proceeds towards the down payment on the new home.  Scrooge’s 12-month Bridge Loan term would provide ample time for Cratchit to sell his existing property.  And, Scrooge waived all Bridge Loan payments until Cratchit sold his current home – when the principal would be paid back plus accrued interest. 

Cratchit made an offer on his dream home the next day!

Here’s the Point: Bridge Loans are alive and well, and therefore you don’t necessarily need to sell your current home before purchasing your dream home.

Bank Statements Only – No Tax Returns Required!

Do you own your business and maximize your expenses to minimize your taxes?

Who wouldn’t employ this strategy!

Well, a break-even tax return would prevent you from getting a conventional mortgage. But if your business has been open for two years, and you can show reasonably consistent deposits each month – then you might qualify for a mortgage under a bank statement program.

You can be approved for a mortgage based solely on your bank statements – without the lender even needing to see your tax returns. There are programs that will accept as little as three consecutive months of bank statements. The more months you are willing to provide (i.e., 24 months provides the best interest rate), the more comfortable the lender can become with your operations.

The lender will tally your average business deposits, and apply an expense ratio – which could be from: (i) an internal or third-party industry standard, (ii) your external accountant, or (iii) your Profit & Loss Statement that matches your selected bank statement period.

Since your resulting net income figure is used to calculate the mortgage amount for which you could qualify, it is more advantageous to select the current bank statement period that maximizes your business deposits.

Some lenders will:

  • Extend a loan as high as 90% of the purchase price (Required: 680+ FICO, 4 months reserves)
  • Credit you for any positive net cash flow from a rented property that has at least 25% equity
  • Allow you to use a gift for the down payment

Here’s the Point: Don’t pass on obtaining a mortgage just because you think your tax return doesn’t
report enough business earnings.

What Seller Concessions Are Allowed?

Sellers know their bottom-line sales price. But sometimes it pays to incentivize a motivated Buyer – especially if the Buyer has limited liquidity to cover their down payment, closing costs and reserves.

If a Buyer makes an offer contingent on financing AND predicated on the Seller paying for all or a portion of closing costs (i.e., concessions), then the Seller may wait for a better offer. However, if the Buyer’s offer is silent on concessions, the contract may progress to a stage where the Buyer may consider sweetening the purchase price – in exchange for dollar-for-dollar concessions at closing.

A few issues to consider when Seller concessions are involved:

  • The property may not appraise at the increased purchase price
  • The loan amount is likely to increase, thereby potentially making it more difficult for the Buyer to qualify for the mortgage
  • The higher capital gain may have adverse Seller tax ramifications

Lenders refer to Seller Concessions as Interested Party Contributions (IPC’s)IPC’s are generally the responsibility of the Buyer – but paid for by the Seller, and are either “Financing Concessions” (e.g., mortgage closing costs) or “Sales Concessions”. Financing Concessions are expressed as a percentage of the lesser of the appraised value or purchase price, and any costs covered by the Seller that exceed the Financing Concession limits (per the chart below) are deemed Sales Concessions.

chart

Note that lenders deduct all Sales Concessions from the sales price when calculating LTV for underwriting purposes. Therefore, excessive IPC’s could limit the amount of Buyer loan proceeds.

Here’s the Point: Lenders impose limits on certain Seller Concessions (IPC’s), which, if exceeded, may provide pre-qualification challenges for Buyers.

Ramifications Persist – Thanks In Part To Unscrupulous Brokers

Subsequent to the Housing Crisis, the 2010 Dodd-Frank Wall Street Reform Act imposed many new rules. This was a response, in part, to some unscrupulous mortgage lenders and brokers charging excessive fees to consumers.

Mortgage lenders and brokers cannot charge origination fees to borrowers that represent more than 3.0% of the loan amount (the “Points & Fees Cap”). As reasonable as this fee cap concept sounds, it is fraught with restrictions that are unfair to the people it was meant to protect.

Let’s take an example of a consumer wishing to borrow $120,000 to buy a home:

$2,700.00 - Mortgage Broker Fee (2.25%* of Loan Amount)
     975.00 - Lender Administration (Standard Average Flat Fee)
$3,675.00 - Total Origination Fees

* Average Florida mortgage broker fees range between 2.0% to 2.75% (based on the interest rate selected, the borrower is eligible to receive a credit at closing to fully cover this fee for most conventional loans).

On the surface, the loan fails the 3.0% Cap (i.e., $3,675 of fees represents 3.1% of the loan). This renders the loan a “Non-Qualified Mortgage”, in which case Fannie Mae could elect not to purchase the loan from the mortgage lender. The lender might stamp “decline”, given their potential inability to monetize the loan.

And, if the lender imposes customary “risk adjustment fees” to compensate for a higher loan-to-value or lower credit score (or if the borrower pays a reasonable fee to “buy-down” the rate), these “Discount Points” must also be added into the calculation – making it impossible for the borrower to obtain a Qualified Mortgage. Fortunately, the regulators have acknowledged that some “bonafide” fees may be excluded from the cap calculation, allowing most mortgages to qualify after time-consuming compliance checks.

Here’s the Point: Regulators imposed a “Points & Fees Cap” to ensure that mortgage lender and broker fees are reasonable, but the resulting time-intensive compliance checks can delay closings.

Subprime Mortgages Alive and Well?

When U.S. housing prices peaked in 2006-07, the subsequent period of unprecedented value depreciation was attributed mainly to housing speculation – fueled by subprime lending. Today, billions of dollars of debt is still being extended annually to consumers who are unable to qualify for conventional or FHA financing.

Some say “Subprime” mortgages have merely been disguised by re-naming them “Non-QM”. Non-Qualified Mortgages are residential loans that do not comply with post-housing crisis standards, as set by the Consumer Finance Protection Bureau (to ensure borrowers have the “ability to repay” their loans).

Lenders following CFPB guidelines are able to sell their “conforming” mortgages to Fannie Mae and Freddie Mac (government-sponsored agencies). However, mortgages that do not satisfy agency requirements are deemed Non-QM, and are either held by the originating lenders or sold to yield-driven investors.

Although opinions vary, loan underwriting is very different today than during the housing bubble. Subprime loans were generally earmarked for borrowers with poor credit, and consisted of excessive interest rates, prepayment penalties and negative amortization (where loan principal increases over the life of the loan, rather than decreases).

Mainstream national Non-QM lenders mitigate risk today through a combination of protective policy guidelines, as well as prudent credit score, reserve and debt-to-income/loan-to-value ratio requirements – all of which have helped to keep defaults and foreclosures to a minimum. Borrower liquidity and repayment ability are being more closely scrutinized by Non-QM lenders than before, and adverse loan terms are rarely seen in forward residential mortgages today – at least for now...

Here’s the Point: If you are unable to qualify for conventional or FHA financing, there are still plenty of programs available to help you with your purchase or refinance – but the terms have tightened considerably since the subprime era.

No Wonder People Are Working Longer

people working longer

Results from recent studies by Northwestern Mutual and the Federal Reserve indicate that people are relying on home equity to carry them through retirement:

  • One-in-five Americans (20%) have NO retirement savings (another 10% have less than $5,000)
  • Almost 50% of adults have taken no steps to prepare for the likelihood of outliving their savings
  • 10,000 Baby Boomers turn 62 every day (the generation closest to retirement age born between 1946-64, representing almost one third of the U.S. population)
  • One in three Baby Boomers have between $0-$25,000 in retirement savings
  • 50% of Baby Boomers have no retirement savings

These are scary statistics, especially given the continuance of rising healthcare costs and the U.S. National Debt now over $22 Trillion (renewing concerns about the adequacy of and reliance on Social Security funds). And 65% and 36% of retirees receive at least 50% and 90% of their income from Social Security, respectively.

The saving grace is that 80% of seniors have substantial equity in their homes (an all-time high).

However, with people living longer (85+ is the fastest growing demographic in America) coupled with nominal income and insufficient savings, many retirees will have difficulty refinancing their homes or qualifying for a purchase mortgage.

One alternative is to sell their home and pay cash for a downsized home – however, the change is not always economical or welcomed, and the new location may carry high homeowner’s association fees. The other alternative to seriously consider is a Home Equity Conversion Mortgage (aka Reverse Mortgage).

Here’s the Point: Retirees with nominal savings and income but decent home equity have the FHA-Insured Reverse Mortgage as a commendable solution.

Up Your Credit Score

credit score

LENDER: “We require a minimum 640 FICO score to extend a mortgage. And at 680, you’ll get a better interest rate.”

What they didn’t tell you, is that you could qualify for a conventional or FHA loan with even a 620 score. The declining lender either has an “overlay” (which means their conventional loan risk tolerance is less than other lenders), and/or they just don’t offer FHA loans.

There are many national, reputable wholesale lenders who will underwrite standard FHA mortgages at a 580 credit score – and will even accept a lower credit score if you have at least a 10% down payment.

But – What if you:

  • still don’t quite meet minimum credit score requirements?
  • just missed the next higher FICO score level – which could yield a better interest rate?

For nominal cost, a credit agency can run a sensitivity inquiry to quickly tell you which credit cards need to be paid down and by how much – before a credit bureau increases your score. Once you receive a statement from your creditor evidencing your pay-down, send it to the credit bureaus for a credit score adjustment (but this can easily take 30-60 days).

Alternatively, you could work with a reliable credit agency to expedite this process (usually no more than 5 business days). Under this “Rapid Rescore” process, you are notified once your improved scores are posted, and a new credit report could then be presented to your lender so that you can get on with your mortgage!


Here’s the Point: After paying down a credit card, there are “Rapid Re-Score” programs to arrange for the credit bureaus to adjust your credit score within 5 business days.

Millennials: Thank Your Parents If They Charge You Rent

millennials-paying-rent

LENDER: “Because you live at your parents' place without a lease and without having a prior mortgage, we cannot offer you an acquisition loan.”

If the above statement was the lender’s sole reason for declining your mortgage, then it is in contravention of the General Guidelines for Analyzing Borrower Credit per the U.S. Department of Housing and Urban Development (HUD). According to HUD, the lack of credit history (or a borrower’s decision not to use credit) may not be used as the basis for rejecting a loan application.

However, if, for example, in addition to no housing history:

  • your credit score is low due to prior delinquencies,
  • you are in the middle of negotiating an IRS payment plan for taxes owing,
  • you are self-employed with an inconsistent net income stream, or
  • your credit cards are new and with limited revolving credit availability,

… then you are not likely to get a conventional or FHA loan!

POSSIBLE SOLUTION: You might still be able to get a mortgage approval if you can demonstrate that you have been consistently contributing to household expenses – thereby, in effect, helping with your parents’ mortgage. Although it is always better to make payments by check (to more easily track your contributions), even cash payments can be acceptable support – in the case where your withdrawals can be matched to deposits in your parents’ bank statements.

Other compensating factors include showing that you have a consistent pattern of payments for utilities, vehicles, or insurance.

Here’s the Point: If you do not have any recent rent or mortgage payment history, then you will need to be patient and creative to get a mortgage.

Artificial Intelligence in Mortgage Underwriting

Artificial Intelligence

LENDER: “I’m sorry to say that your loan request has been declined. We just couldn’t get a green light from the software program we use.”

YOU: “So I was declined by a computer?”

LENDER: “Well, sort of. You had several factors working against you including your credit score, some late payments, and the fact that you wanted to minimize your down payment.”


The above exchange actually happens more than you would expect. The explanation, while not very helpful, is actually about the best you will get – because the workings of the algorithms used in this standard mortgage software are unknown to almost everyone in the industry, except those who designed it.

There are two programs used by lenders to qualify their borrowers for conventional or FHA financing: Desktop Underwriter (DU) or Loan Prospector (LP). DU is required by the Federal National Mortgage Association (FNMA or Fannie Mae), and LP is required by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). And, Fannie Mae and Freddie Mac, government-sponsored enterprises (GSE’s) founded by Congress, are the ultimate buyers of your mortgage. Without getting a green light from one of these programs, your loan may be declined.

Avoid these factors to maximize the probability of getting a DU “Approve/Eligible” or an LP “Accept” finding:

► Loan-to-Value ratio > 80%

► Debt-to-Income Ratio > 43%

► Low Down Payment & Cash Reserves

► New Credit Cards with Low Borrowing Capacity

► Credit Score < 640

► Late Payments/Collections

► Limited History of Mortgage/Rent Payments

► Several Credit Inquiries

Here’s the Point: Without an “Approve/Eligible Finding” from Fannie Mae, you aren’t likely to get a conventional or FHA mortgage – and you may need to call a portfolio or private lender.

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