Everything looks good on your application for a mortgage to purchase your single family residential investment property:
But then, in the process of reviewing your documentation and running their required public record reports, the underwriter discovers that you own other financed properties…
Conventional underwriting guidelines require borrowers to have a significant amount of reserves when you have multiple financed properties. For example, if you have two other $100,000 mortgages, you are required to show that you have $4,000 of additional reserves in the bank – representing 2% of the Unpaid Principal Balances (UPB) of these mortgages. This percentage increases to 4% of UPB if you have five or six financed properties, and 6% of UPB for up to ten financed properties.
Three reserve considerations when you have multiple properties (the last two requirements apply to the to-be-financed property, and only the last one requires that funds be escrowed):
1) 2-6% of Unpaid Principal Balances
2) 6 months PITI (Principal, Interest, Property Taxes and Insurance)
3) 3-4 months escrow cushion for property taxes and insurance.
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.