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.

 

 

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)