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.

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.

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!

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.

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:

Jamie Dimon, CEO of JP Morgan, once wrote in a memo to shareholders that: “…mortgages are offered as a benefit to customers, not because it's a sound investment for the bank." In a recent article by CNBC, one-third of consumers surveyed complained about how their mortgage was handled by banks – and two-thirds of the complaints related to how banks handled all loans in general.

The excitement you experience during your first real estate purchase quickly dwindles when your bank demonstrates their apathy.

There are so many ways for banks to make the mortgage experience much less frustrating, yet “quality service” and “follow-up” tend to be forgotten. For example:

• You were told that your loan application would be reviewed before the end of the week [But then you call your bank for an update and find out the underwriter in charge of approving your loan is out of the office]
• You compile all back-up support to evidence your income and property insurance [But then you call your bank for an update and find out three of these items have been misplaced, and were never seen by the underwriter]
• You go to the closing to sign documents and get the keys to your new property [But then you call your bank for an update and find out you need to wait three hours before they approve the documentation and authorize the loan disbursement]

The way some bankers handle mortgages for consumers is certainly not the way they would handle their own mortgage!

Your wife just fell in love with a beautiful house on Valentine’s Day.

“Honey I will love you forever!”

If your purchase requires a loan amount that exceeds the standard conforming loan limit ($484,350 per the Federal Housing Finance Agency), it will be considered a "jumbo loan", for which special rules may apply.

For example, if you prefer your down payment to be only 10%, your bank statements or retirement savings accounts may need to show additional liquidity in the amount of 12 months PITI (the projected monthly amount of your Principal, Interest, Taxes and Insurance).

And, you will need to address these questions:

• Is the loan for your primary residence?
  [If not, there will be higher down payment, credit score, and reserve requirements for a second home or investment property]
• Is your credit score at least 680?
  [If not, you may need to use a private lender, and your interest rate will be higher]
• Do you have enough reserves?
  [If not, consider structuring a piggyback mortgage – that is, a conventional first mortgage up to the $484,350 maximum limit (so that the higher jumbo loan reserve requirements do not apply), and obtain a Home Equity Line of Credit for the balance]
• Is your Debt-to-Income ratio below 43% (40% if a 1st Time Homebuyer)?
  [If not, you could increase your down payment (to lower your monthly PITI obligation), pay-off your car loan (to reduce your non-housing debt obligations), or negotiate an interest only structure (to eliminate your principal amortization)]

You just returned from a fantastic holiday at your family’s Florida vacation home. You have always loved the home, which is owned debt free by your Mother and her Brother (your Uncle). Now your Uncle might like to unload his interest. He wasn’t gripped by your suggestion of gifting his 50% interest to you, and so you need a mortgage to make this work.

Here are some lending options (be sure to consult with legal and tax professionals):

1. PURCHASE

• Although your Mother wants to keep her interest, she must be removed from title along with your Uncle (so the lender’s mortgage can be secured by 100% of what will become your property)
• Your Mother could provide you with a “gift of equity” (her 50% interest), and you could obtain a loan for the balance of the purchase price
• Quit-claiming a 50% interest back to your Mother after closing would be prohibited (although the lender is not likely to audit this after closing)

2. REFINANCE

• As your Mother will remain on title, she can qualify for a “cash-out refinance”, and you could be added to title at closing (at the same time your Uncle is removed from title)
• Although borrowers cannot refinance a property until they have owned it for 6 months, this condition is satisfied by your Mother’s prior ownership – but she must be a co-borrower
  
  

3. UNCLE LOAN (Fastest/Cheapest)

• Have him quit-claim his interest to you, and pay him back over time at a reasonable interest rate