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Creative thinking saves Client $200k

Saving my client from writing a $200,000 check

We run into a lot of interesting scenarios in the mortgage industry to help people get home loans. After a while, they blend together because trends come and go. However, this scenario was unique and challenging. We recently closed a mortgage loan for a high income earning client saving them from writing a $200k check to their ex-spouse.

Before we continue, I must point out that our client is not avoiding any due payments but instead following the advice of their financial adviser in the timing of payments.  Without too much detail, a large sum had been paid out prior to this $280k described later on.  We simply were attempting to help lesson the financial hit all at once with saving the borrower the $200k upfront.  The borrower is fulfilling their roll as we speak.

Learning from the Past

This wasn’t our first rodeo with our borrower. A year earlier we worked together helping them purchase an investment property with 30% down. The credit score was 620 and to top it off, there were several late payments on their existing mortgage loan. You might ask, “why would a high income earning professional be late and have a low score?”. The answer: It was not their fault.

Life happens, and the borrower was in the middle of separating from their spouse, who was living in the home with the late mortgage payments. They made an agreement that the spouse would pay the mortgage. However, payments were missed, and it adversely affected our client’s credit in a big way, dropping his FICO score to 620. Our client of course brought the mortgage current and managed the payments moving forward.

We finalized the loan on the investment property but spent a lot of time sorting out details and collecting all the necessary paperwork for their loan. Some loan approvals can be messy, but they were approved and now have a great income producing property!

The Scenario

Fast forward to 2018, our client was interested in purchasing a new home. From our last experience, we both knew everything had to be right this time around. We are in a seller’s market and the last thing we needed was to waste time and lose money.

It’s always serious business when buying a home. In this case, we were preparing for a purchase of $920k and working to make the payments affordable while building a loan application around guidelines favorable to the client for an approval.

We collected our client’s financials, reviewed their credit and discussed our strategy. For everything to work, the divorce had to be finalized. Last year, the couple was in mediation working out the details. They had just filed their petition with the court around the time we began the pre-qualification for the new home.

In addition, there was a lingering item on credit holding back our client. He had a high FICO of 780, but his mid-score was showing 650. We referred him to our credit expert and for $100, the negative item was removed, and his score jumped to 750. Beautiful! It should be noted the negative item was not his and he had proof to show it. We just helped him remove it faster.

So far, we are moving smoothly recalling last year and the issues we struggled with. Our homework was paying off and we were ready to start shopping for homes. We were moving along so well; our client went under contract and we agreed to push for closing before the actual close of escrow (COE). This is not something we promise in scenarios as complex as this, but we felt confident in the opportunity.

Our Challenge

Understanding how loan guidelines work, it’s important to have your plan for getting an approval defined from the start. You should also maintain a back up plan if the first one doesn’t work. We had a plan B and used it.

Our client’s jumbo loan was not going well because the investor had a pass/fail approach to their credit. Remember those mortgage late payments from last year? Well, the investor didn’t like the fact that they occurred within the last 24 months. The kicker was, we provided over 2 years of financial reserves and accounted for their requirements that the reserves be 70% of the balance to account for time and the vesting style of those funds. In addition, our debt-to-income ratios were well within limits.

Plan B was to split the mortgage into a first and second. Our first mortgage needed to be $453,100 to conform to Fannie Mae loan limits (for 2018) and we financed a portion of the down payment in the form of a second mortgage at $236,900. Our client came in with $230,000, 25% of $920k, their original commitment. The “plan A” mortgage payment was roughly $120 less then the plan B solution, but the second mortgage could be paid off sooner with no penalty effectively lowering their housing expense without refinancing. For borrowers with high incomes, this solution can be favorable as a low maintenance solution.

The Solution & Result

The jumbo loan idea was scrapped to give us a chance of closing before the intended COE. We turned around a loan approval for the first mortgage at $453,100 within 24 hours and submitted for the second mortgage approval in that same time. After another 24 hours, we received the second mortgage approval with some conditions.

One of the conditions for the final approval, issued by the second mortgage firm, required proof that our borrower completed the lump sum alimony payment to his ex-spouse as described in the divorce decree. What made this condition problematic was the divorce decree did not describe how or by when the payment needed to be completed. It was one sentence with no clear direction.

Equalization Payment

a. (Client) shall pay to (ex-spouse) the sum of Two Hundred Eighty Thousand Dollars ($280,000) as a non-taxable equalization payment for the division of property.

Our underwriting team (first mortgage at All Western Mortgage) did not require this to be paid prior to the loan approval. In most cases, alimony payments & child support are added to a borrower’s monthly debt obligations because there is a clearly defined payment and date for the payment to be received. However, this kind of payment is treated as a contingent liability and is NOT required to count in the borrower’s recurring debt obligations per Fannie Mae guidelines. See below:

Writing a check for the remaining $200k he owned, upfront, was something he was not prepared for, especially since the funds were tied up in specific stocks which had penalties if liquidated too soon.

Fortunately, our client already paid out $80k towards this balance owed ($280k) in the last 45 days. They were clearly paying to chip away at this total. Anytime a liability is less than 10 months away from being paid off, the lender can choose to omit the debt/liability from the application if the debt does not adversely affect the borrower’s ability to make their mortgage payment.

Based on our client’s assets, their payments towards the $280k owed to their ex-spouse, and their reserves, we presented the case that the remaining $200k will be paid off in less than 10 months, given the rate the borrower paid thus far and other factors. Our client was approved with the clear-to-close on the second mortgage because of this presentation.

Conclusion

The client was grateful and happy that everything worked out. They were phenomenal despite our challenges. Not to say it wasn’t stressful. It’s worthy to note that our client’s Realtor, Liz Lovett, was fantastic and amazing to work with and my Processor played a huge roll in the approval.

Most lenders want the quick and easy loan to close. Despite the difficulty and challenges, I am grateful for the opportunity for growth it presented. But most importantly, I am humbly appreciative of the Client, their Realtor, and my Processing team for trusting & helping us through this file.

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