Mortgage Approval! (Not So Fast)
Everything looks good on your application for a mortgage to purchase your single family residential investment property:
- You are under contract at a below-market purchase price,
- You have a signed lease with rent that far exceeds your projected property expenses,
- You have sufficient liquidity to cover your down payment, closing costs and prepaid expenses,
- Your credit score is excellent,
- Your Debt-To-Income Ratio is below the standard 43% threshold (monthly combined housing and other debt obligations divided by monthly net income), and
- You received an “Approved/Eligible Finding” on the required Fannie Mae report for the lender.
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.
Here’s the Point: If you have multiple financed properties, make sure you have sufficient liquidity to satisfy all of the conventional loan reserve requirements before obtaining a mortgage.
TV Mini-Series: “The Borrowers” (Episode 2)
FADE IN:
♪ Ring Ring.
OMC: “Hello, this is Mike from Ocean Mortgage Capital – How can I help?”
CLIENT: “Hi – My Friend would like to borrow money to replace the roof on her house. She has a roommate who agreed to be a co-borrower.”
OMC: “Is your friend unable to qualify for a mortgage on her own, and so her roommate is willing to co-sign on her loan?”
CLIENT: “Yes, exactly. My friend’s husband should be able to qualify for a mortgage, but he doesn’t think it is necessary to borrow money to fix the roof.”
OMC: “Well, your friend and her husband would both need to sign the mortgage – which means they both need to cooperate and show they are willing to allow a mortgage to be secured by the home.”
CLIENT: “Tell me more about how her roommate can help my friend with this loan.”
OMC: “To be a co-borrower, your friend’s roommate could apply for and be jointly liable for the loan, but would typically have ownership in the property (lenders prefer occupying or non-occupying co-borrowers to also be on title).”
CLIENT: “The roommate does not have any ownership interest in the property.”
OMC: “If not on title, then the roommate could be a co-signor who guarantees all obligations under the loan, jointly with your friend. However, this loan cannot proceed unless your friend’s husband agrees to sign the mortgage – whether he is a co-borrower or not.”
CLIENT: “That will never happen.”
OMC: “Then unfortunately neither will your friend’s loan.”
Here’s the Point: Before obtaining a loan on your primary residence, make sure your spouse is willing to sign the mortgage document – otherwise the lender will not close.
TV Mini-Series: “The Borrowers” (Episode 1)
FADE IN:
♪ Ring Ring.
OMC: “Hello, this is Mike from Ocean Mortgage Capital – How can I help?”
CLIENT: “Hi – My Friend would like to take $50,000 of equity out of her home to buy a business. Can you tell us what her home is worth?”
OMC: “Well, we can help to arrange a cash-out refinance of her home, but she should really speak with a realtor or appraiser about valuing her house. Her realtor should have access to some sales comparables, and she could also check Trulia.com or Zillow.com to get a preliminary indication of value.”
CLIENT: “Thank you – I’ll tell her.”
OMC: “Okay – and if she concludes that the value would support her loan request, then I would be happy to pre-qualify her. I would need to ask her about her income to confirm she is comfortably able to make the required mortgage payments.”
CLIENT: “So then I should tell you that her husband lost his job recently, but he had been working with a good company for at least 15 years.”
OMC: “Well, her husband’s prior employment experience should help him with his interviews and support his job search. Hopefully he will land something soon. Is your friend presently employed to help support their mortgage request?”
CLIENT: “No”.
OMC: “Not only does your friend and/or her husband need to show they presently have ‘the ability to repay’ from their earnings, but they will also need to show that their income is likely to continue for the next three years.”
Here’s the Point: Instead of setting yourself up to default on a mortgage, make sure your income comfortably supports your ability to make your monthly loan payments and other obligations.
IDEA: Let’s Hide a Few Assets!
Very Bad Idea.
A mortgage broker will help compile your mortgage application paperwork so that:
- your financial condition is accurately depicted,
- the lender will be able to more easily and efficiently review your file, and
- you are portrayed in the best possible light.
The whole idea is to present a thorough, well-organized package to expedite a sound credit underwriting decision for your benefit.
A good broker should make it so easy for the underwriter, that practically all of their work will be completed for them in advance – which they will very much appreciate. This includes identifying any and all risks, and the corresponding mitigants that will, ideally, allow the underwriter to quickly approve your loan request.
An incomplete, disheveled submission not only reflects poorly on the broker (who should be keenly focused on their reputation), but it will underscore the fact that you are just not ready to obtain a mortgage.
The absolute worst thing is to omit critical information from the submission. Sometimes a borrower will not disclose certain assets they own – thinking that the additional equity or liquidity are not required.
“My reported net worth is sufficient without having to disclose my other rental properties”
Lenders run ownership reports designed to uncover everything. If you sign a loan application that is obviously missing material assets, it will be an uphill battle once the error is discovered. Inadvertent omission is one thing, but intentional omission is likely to be perceived as fraud by the lender.
Here’s the Point: Asking your mortgage broker to hide something from the lender is tantamount to fraud, and there is no place for that in any industry.
Brokers Are Back
The Mortgage Bankers Association reported that retail banks (Wells Fargo, Bank of America) held 75% of the U.S. mortgage market before the Housing Market Crash of 2007. This ratio has now reduced to 50%, after the tightening of regulations from the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010. The other 50% of mortgages are extended by “nonbanks”, which are mortgage lenders who do not take federally insured deposits from consumers to make loans.
Like retail banks, some nonbanks lend directly to the public (Quicken Loans, Rocket Mortgage). But nonbank lenders also include “wholesale lenders”. Wholesale lenders offer the most competitive interest rates because they use mortgage brokers to originate loans (and therefore do not have the corresponding overhead costs).
United Wholesale Mortgage (UWM) is the largest U.S. wholesale lender, closing $22.9 billion of mortgages in 2016. UWM reports that mortgage brokers handled 35% of all U.S. residential mortgage closings in 2005. After the housing crisis, this ratio bottomed at 10%.
Mortgage broker loan originations are now back up to 14%, with UWM projecting an increase to at least 20% by 2020. This market share growth is supported by what the public is embracing again, which is that only mortgage brokers:
(i) help consumers shop among many well-developed capital sources for the best mortgage rates and fees
(ii) have a multitude of mortgage products from which to choose (far more than any one lender), and
(iii) do all the consumers’ legwork and negotiate for the fastest loan execution.
Here’s the Point: Consumers are taking notice that only mortgage brokers shop the best mortgage lenders in the nation – which means a better interest rate and a faster closing.
Immigrant Lending: An Odd Discussion With A Banker
“Mike, I’d like to refer you a typical immigrant client who doesn’t have a social security number and runs a ‘cash business’ – and I think you know what I mean”.
“No, actually, I don’t know what you mean. Does their business generate a lot of cash earnings that they do not report to the IRS?”
“Well, I didn’t say that – but okay”.
“Sorry, I can’t help you – I don’t risk my reputation by recommending that my capital sources conduct business with someone who illegally evades taxes. Moreover, I think it’s offensive to imply that immigrants typically operate cash businesses to evade taxes”.
“Well then what exactly do mortgage brokers do?”
Before quickly ending my conversation with the banker (for obvious reasons), I indicated that I would be happy to work with self-employed people who legally minimize their taxes with legitimate expense deductions. Also, I would be happy to source mortgages for those who have not yet become U.S. citizens, do not have U.S. permanent residency, or even have not yet qualified for a social security number.
Surprised?!
As long as a “foreign national” or non-U.S. citizen can evidence an adequate two-year foreign or domestic credit history, there are capital sources who will gladly underwrite their mortgage. In fact, it is a preferred business platform because statistics prove that these borrowers work hard to repay their debts – and tend to have solid liquidity and reserves. One key issue is that all required documents written in a foreign language need professional translation.
Here’s the Point: Not having a social security number or green card doesn’t mean you can’t qualify for a mortgage – but you must be properly reporting your income.
Would You Lend Money to Donald or Hillary?
You may have been conscientiously deliberating which candidate to vote for over the past several months. Your selection might become clearer if you contemplate this title question – as if you were a lender deciding whether to extend them a loan! Not voting is always an option, but not likely a decision that would sit well with you (even though reports suggest this option is seriously being considered by many voters).
When a client applies for a mortgage, the assignment is either accepted or declined – with concrete rationale behind either decision. But a lender electing to entirely avoid making the decision to either lend or not – may be compared to not voting. Imagine a lender choosing never to return your phone call to give you their credit decision. In this analogy, not voting (or not providing a credit decision) doesn’t help either candidate (or borrower) – nor would it likely help yourself.
There is no excuse for lender/voter unresponsiveness. Borrowers/candidates deserve prompt, reliable feedback which, from a lender’s perspective, is generally based on the following 5 “C’s” of credit:
- Credit History (Repayment History & Credit Score)
- Capacity (Ability to Repay & Earnings Stability)
- Capital (Down Payment & Liquidity)
- Collateral (Property Type & Value)
- Conditions (Loan Terms & Purpose)
The first one above was formerly entitled “Character” – which arguably is still the most important factor. But by telling a client their loan was declined because of “Character” (or lack thereof), the decision could be judged as discriminatory.
Here’s the Point: Don your lender’s cap and consider the key factors that would be used before advancing money to either candidate – and focus particularly on “character” before making your decision.
Student Loans Matter
The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are not
making their monthly loan payments. This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship. It’s no wonder lenders have tightened their related underwriting requirements!
Some say the consequences of simply assessing a higher default rate of interest is not harsh enough. Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.
A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default. But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.
When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date. Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%. Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.
Here’s the Point: Even when your student loan is deferred, lenders are now likely to take the projected monthly payments into consideration when qualifying you for a mortgage.
Foreclosure? No Problem
It is surprising how many people have zero remorse after a foreclosure. There are those who think nothing of going through the process again to advance their self-interest, with little regard for either their ability to repay or their reputation with a lender. For this reason, lenders do not zealously arrange mortgages for post-foreclosure loan applicants without a thorough screening process.
It doesn’t take long to deduce moral character and integrity. If it is evident the “incident” will never happen again, there are reputable private lenders who are willing to provide a new mortgage – even one day after the foreclosure is finalized (at interest rates that are reasonable under the circumstances).
The Federal National Mortgage Association (FNMA), the ultimate buyer of a conventional loan advanced by a mortgage lender, requires borrowers to wait seven years after title has transferred in a foreclosure proceeding. However, the Federal Housing Administration (FHA) requires that just 3 years elapse before they insure the mortgage advanced by an FHA lender – whereas the Department of Veterans Affairs (VA) needs only 2 years to elapse before guaranteeing the mortgage of a VA lender.
As long as the Certificate of Title is produced evidencing that the 3-year anniversary requirement has been met, a post-foreclosure borrower may obtain an FHA mortgage. And the loan application can be made in advance so that borrowers are ready and able to close on a timely basis, regardless of how the foreclosure is reported on a credit report by the credit bureaus.
Here’s the Point: After a foreclosure, an FHA mortgage is the most common type of conventional financing used because only 3 years need to elapse from the Certificate of Title transfer date.
Saved by… the Appraiser?
I think it’s time we cut them some slack. No doubt there are instances where the appraiser completely missed the boat – when values were quickly overturned either after correcting errors or reflecting missed facts. I hear countless stories where the FHA appraiser was “too picky” regarding some of the reported observations on the condition of the property.
Lately, I have had several borrower prospects complain about their realtor or mortgage broker not recommending a property inspection. “I bought the house and had no idea there was a roof leak.” “You should have seen the termites in the attic right after we closed the deal.”
Let me tell you something: Engaging a property inspector is entirely up to the borrower/buyer – caveat emptor. Sure, there are times when it is obvious – and therefore when it is incumbent upon the industry professionals to strongly suggest an inspection by a licensed contractor. But if you purchase a property, it is your fault if you elect to forego the inspection and later find serious problems.
One appraiser recently conditioned his report on the receipt of an inspection report – to address what appeared to be some insignificant siding damage. The lender refused to close and fund the loan until a professional contractor confirmed in writing that the damage was cosmetic. It was a great call by the appraiser, because it turned out there was over $15,000 of structural damage from dry rot. That “picky” appraiser saved my clients from committing to a serious money pit.
Here’s the Point: If you decide not to have a licensed contractor perform a property inspection, then you are to blame for problems uncovered after your purchase.
