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Mortgage Forbearance: What you should know

The recent COVID-19 crisis has been a constantly evolving issue in the financial services industry including mortgage banking.  Much discussion has shifted from lenders being at capacity to offer low rates to how the FEDs buyback program and Mortgage Forbearance are hurting interest rates and obtaining credit for housing.  Below are some things to consider before taking a Mortgage Forbearance.

Please Note: Homeowners who need access to a forbearance should be able to obtain it.  This summary is meant to encourage Homeowners to consider their options prior taking a forbearance.  A mortgage forbearance can have serious financial implications if considerations are not reviewed responsibly.

What is a Mortgage Forbearance?

A mortgage forbearance is a kind of payment deferral where your mortgage payment is put on hold until a later date.  When that later date occurs, the Homeowner is responsible for resuming their mortgage payment.  It can help stall the process of foreclosure on the home so the Homeowner can attempt to get back on their feet financially, allowing them to keep their home. 

Recent action by the Federal Housing Finance Authority (FHFA) is requiring mortgage servicers to allow mortgage forbearance for those borrowers affected by COVID-19 issues such as job loss, loss of income, contracting the virus, death of the primary wage earner due to COVID-19, etc.  You do not have to had contracted the virus to attest for a forbearance.  Additional information is available here from FHFA

Will a forbearance affect my credit or will I be charged late fees?

The FHFA has instructed mortgage servicers that consumers’ credit should not be affected if a forbearance is granted and that late fees or penalties are to be waived in that event.  However, we have already seen credit reports reflecting “forbearance” under a borrower’s mortgage loan and they were marked 30 days late on their payment. Banks are reporting and allowed to show “Forbearance” under the mortgage account if actively in this status.  While this consumer could make a case for the forbearance and late mark to be removed, they will most likely go through many challenges before it is removed IF the servicer is willing to comply. 

Can I get a new mortgage loan if I have a Forbearance?

Not really and likely No for now. This includes refinances and is evolving day-by-day. Banks may introduce overlays, or additional requirements in the future, before you can successfully close on a new home loan if you have a forbearance.  For now, banks are NOT allowing new home loans with a current Forbearance showing on credit. In addition, it is possible that as more Homeowners use Forbearance, Fannie Mae, Freddie Mac, and HUD may update their guidelines to include seasoning periods or specific requirements for borrowers who have a Forbearance on their credit.

Will it be more difficult to get a mortgage loan if I do NOT have a Forbearance?

During times of recession, lending guidelines (in general) condense to ensure qualified individuals can make their mortgage payments on time.  The ability to repay a mortgage loan focuses on income, credit, and assets of a borrower.  All three areas must meet qualifying guidelines.  Obtaining a mortgage loan depends on the borrower circumstances.  If a borrower has a good stable work history of receiving the same income consistently and pays on time, the borrower should be able to qualify.  Again, this depends on the bigger picture the borrower is presenting for a home loan.

What does a forbearance payment plan look like?

  • Lump Sum – Some plans may require the full lump sum of deferred payments due all at once.  If your total mortgage payment is $2,000 per month (includes PITI) and you defer for 6 months, you will have $12,000 due at the end of the deferral.  Remember, the servicer is paying out the interest due to investors and paying out the Property Tax and Insurance premiums when due.  The servicer wants to be whole again, especially if they are borrowing funds to meet these obligations.  This is the most common and likely plan the servicers will use.
  • End of the Loan – Other plans may put the balance owed at end of your loan term, being added to the principle owed on your home loan.  You risk losing any appreciation gains with this option, especially if you just purchased your home. This option is more like a loan modification. Anticipate needing to show hardship for this type of plan. For now, how this plays out is still yet to be determined.

What if I want to hold my mortgage payments for 6 months and save the money?

Many Homeowners have considered holding their mortgage payments aside for the forbearance time to build up a reserve fund in case they lose their income.  Every situation is a case-by-case as there is no litmus test to say one thing or another.  However, consider that your interest rate on your checking or saving account is next to nothing compared to the interest you pay on your mortgage.  The money sitting in saving accounts that would have been made for the mortgage payment does not earn enough to have the money sitting there. 

A Homeowner who may lose their income and wants to have some relief so they can cover everyday expenses like groceries or utilities can make a good case for the need to have forbearance.  But, there are still other solutions.

What are some other solutions to a forbearance?

  • 401k & IRA Accounts – The IRS has put special waivers in place for withdrawing from your 401k or IRA for COVID -19 hardships such as waiving the 10% penalty on IRAs and allowing for additional loans or higher loan amounts against a 401k.  Speak with your HR representative about your 401k options or your Financial Advisor about IRA options
  • Refinance your existing mortgage – It may seem an obvious solution given my profession, but a rate/term refinance or cash out refinance can add to your monthly cash flow and reserves if you are still employed.  Even if you are furloughed during this time, but have savings, you could be eligible for a home loan and refinance.  Many of my clients have used this solution.
  • Skipping 2 months’ payments – Since you are refinancing your home loan, the payoff of the old loan serves as your mortgage payment.  Instead of making your payment, we can work so your loan closes before it is due.  Interest must be earned on a home loan before it can be collected.  So, say you are closing this month, April.  You let the payoff serve as your April payment, May must be earned interest by the bank (no payment due), your first payment is due June 1st.  Plus, you can take a small amount of cash out when doing a rate/term refinance (usually less than a percentage of the loan, no more than $2,000).  If you have a mortgage payment of $2,000, skipping 2 payments and taking the potential max cash back, you have $6,000 added to your saving account.  Finally, don’t forget any added monthly savings you gained from your refinance.
  • Cash out Refinance/Debt Consolidation – The Economic Impact Payments (EIP) are great for helping consumers and Homeowners.  I pray people choose to save the funds or pay their obligations.  But remember, this is one-time.  Using your home’s equity and taking cash out on a refinance can potentially help you save hundreds per month by reducing or eliminating unsecured consumer debt.  That is a savings that adds hundreds every month to your cash flow.

Summary

The news and guidelines continue to evolve during this unprecedented time.  Despite the abrupt slow down in the economy, housing is expected to remain strong and values are expected to continue appreciating.  The demand for housing is strong all around.  Interest rates will fluctuate between now and the next few months.  But they are remaining at all time lows.  There will be more opportunity for housing, especially with lower rates on the horizon. 

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When is a Good Time to Buy a Home?

The first time the idea of purchasing my first home came to light, it was my future father-in-law that made the suggestion.  This was 2 years before I became a loan officer in 2012.  I was working in retail finance, but had so much debt from school, the idea of homeownership never crossed my mind.  The suggestion from my future father-in-law came up because I needed a place to live.  It also may have been a plot to marry his daughter, my now lovely wife.  But we will move on from there.

Necessity vs Timing

Most of the time, people get the idea of purchasing a home because they have a lease coming due to either renew or move on to a new place.  This creates a necessity for maybe buying a home.  It feels convenient to start looking for a home to buy right away when these scenarios come up:

“I am paying $1700 to rent, my lease is coming due, I’d rather pay this money toward a home”. 

Or, it’s: “I am paying $1700 to rent, my landlord is selling the place, they are requiring me to move.” 

Finally, some scenarios playout like this: “I am paying $1700 to rent, my landlord is raising my rent to $2000, I need my own place”.

Everyone’s example of necessity is different.  I find that most prospective borrowers are not prepared for WHEN this time comes.  It’s never a matter of IF this happens but WHEN this happens. 

Take note, you may not be in the position to buy a home now, but it makes good financial CENTS to start preparing and planning for this later.  You then can take necessity and control it with your timing.  Preparation is the key to anything financial and puts YOU in control of your necessity.  Check out steps to pre-qualify for a home loan

Income, Credit, Assets

Perfect credit nor a six-figure income are necessary to purchase a home.  It’s true that your income, credit and assets determine how much you could pre-qualify for or afford for a mortgage payment.  Here are some general tips for when it’s a good time to buy a home:

  • INCOME – You should have a 2-year work history.  This simply means you should be able to show you have consistently earned some sort of income, generally in the same line of work.  There are many types of income considerations, especially for self-employed or variable income borrowers.  Stable and consistent are what the underwriting guidelines measure.
  • CREDIT – A 740 FICO is not required for qualifying for a mortgage loan, nor is perfect credit.  Government loan programs (FHA, VA, & USDA) have exceptions for certain types of credit from how low the scores can be to when a bankruptcy must be seasoned by.  I’ve had Buyers at 580 & 600 FICOs qualify and purchase a home.  Others had bankruptcies seasoned 2 years or less.
  • ASSETS – Down payments are not as scary as some people imagine and are much lower than people realize.  Veteran borrowers need $0 down (in most cases), FHA buyers need at least 3.5% of the purchase price and Conventional buyers can put either 3% or 5% down as the minimum, depending on their income profile.  See more about down payment sources

Market Influences

Have you heard in the last 10 years, “It’s a great time to buy a home!”?  This phrase has been used so much over the last 10 years that it frankly means nothing anymore.  Yes, it is still a good time to buy a home.  But we must ask ourselves WHY in the new decade.  The last 10 years included the recovery of the housing crisis from the recession of 2008.  Analysts are saying we’ve recovered from 2008 and are now where we should have been (hence why it’s called a recession).  So, what does that mean for the future?

The future of homebuying remains strong for most markets largely due to technology and how business is conducted.  Right now, the southwest is a hot market for new emerging and developing businesses and becoming a safe haven for year-round operations for manufacturing and call center business types.  Property taxes, land, and cost of living are much less in most parts of the Southwest and offer a lifestyle for employees that most of the country cannot compete with including year-round sun, Interstate access for distribution, and close proximity to places like California, Las Vegas, and Mexico.  Basically, housing in the Phoenix Metro area is going to continue to thrive, even in a recession because Arizona is what Governor Doug Ducey calls “open for business”. 

What does this mean for buying a home in our market?  Your property value will continue to appreciate even now.  There is a shortage of housing in Phoenix for homebuyers and renters alike.  As our market attracts more businesses, there is a need for housing all over the valley.  It’s basic supply & demand with housing and it’s expected to continue.  Your home will continue building wealth for your future.

Summary

Buying a home is personal and not always for everyone.  See Beyond the Numbers.  It takes some responsibility to understand the opportunity.  Only you can make that decision.  10 years ago, the decision was easy because home prices were extremely low.  Today, it’s a little more complex only in as much the level of preparation of the prospective buyer.  We are here to help in that preparation.

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Evaluating a Down Payment Assistance Program

When I first started as a Loan Officer, Down Payment Assistance (DPA) was all the rage.  Many prospective Home Buyer’s were coming out of the recession with great income and decent credit, but lacked the assets for a down payment.  In addition, home prices were so low that just about everyone could afford the monthly payments and the terms associated with DPA’s. 

Fast-forward to 2019, changes in DPA programs have altered it’s allure and now it’s important to consider how using a DPA will impact your financial future when purchasing your home.  In this post, we explore the various DPA programs, their requirements, the monthly payments, and future considerations.  It’s a lot of information, but well worth the read if you are considering a home purchase in the near future.

*Loan parameters are based on Rates and terms as of 2/1/2019.  Conventional Financing terms based on a 720 FICO score and the Fannie Mae Homeready Program with 3% down payment.  Program terms and rates consider coverage variations prescribed by Fannie Mae Homeready, HFA Preferred, Home In Five, and Home Plus.  FHA Financing terms based on a 660 FICO score. NMLS# 1074188 All Borrowers subject to credit qualifications. Not all borrowers will qualify as certain restrictions apply on all programs. The information contained in this material is not a guarantee to extend credit or lend. Terms & conditions are subject to change without notice.

What is a DPA & what types are offered?

The DPA programs mentioned here are offered in Maricopa County Arizona.  They grant certain percentages of the purchase price on a home in the form of a silent second lien towards the down payment needed.  Home in Five offers special incentives for Teachers, First Responders, Veterans, Military, and Nurses.  Home Plus allows additional funds as a down payment towards your purchase.  Below is a brief list:

  • Home in Five Program
  • Home Plus Program
  • Pathway 2 Purchase
  • Neighborhood Stabilization Program (NSP) – Through a respective City
  • Matthew Hensen Program (tied to NSP)
  • Chicanas Por La Casa

For the sake of time and popularity, we will discuss only the Home in Five and Home Plus programs. 

Home in Five

The Home in Five will grant up to 4% assistance to cover the down payment and/or closing costs on your new home.  The 4% is the max allowed provided you meet the requirements for credit and qualify for the special incentive.  There is a maximum income limit allowed of $99,169 unless you are using the Fannie Mae HFA Preferred portion of the program which is $69,100.  The maximum debt-to-income ratio allowed is 45%.  That means your total obligation (including your proposed house payment) cannot exceed 45% of your gross income used to qualify for a mortgage loan.

Your assistance is calculated off the BASE loan amount after a down payment would be applied.  For example, Buying a home at $275,000 with FHA at 3.5% down using this program, the BASE loan amount is $265,375.  If your max assistance is 3%, the grant will be 3% of $265,375 or $7,961.25 as your grant.  You would still need $1,663.75 for the remaining down payment which can be a gift or come from your own funds.

Source: https://www.ehousingplus.com/wp-content/uploads/PMIDA-HOME-IN-5-FINAL-Guide-01-09-19.pdf

The grant is now considered a forgivable silent second mortgage loan or lien.  There are no payments due on this second lien for 36 months.  You will be required to pay back the pro-rated portion of the silent second loan if you payoff the original first mortgage before 36 months; i.e. a refinance, selling your home, etc.  After the 36 months, the silent second lien drops and you no longer owe those funds.

Finally, the interest rate for the Home in Five program is pre-determined for you regardless of your FICO score.  The program administrator and master servicer set the terms for the rate.  As of 2/1/2019, the rate was 5.625% for the FHA and 5.75% for Conventional & VA.

Home Plus

Home Plus is very similar to Home in Five except the debt-to-income ratio allows up to 50% and the down payment grant can go from 0% – 5%.  However, the more you receive, the higher the pre-determined interest rate.  In addition, the income limit is much lower, $66,100.  Both programs do NOT require you to be a first-time buyer and you are allowed to own other property.  You must occupy the home you are purchasing as your primary residence within 60 days when using either program.

Source: https://lenders.housing.az.gov/

Quick Fact

You may be wondering (or not in which case skip to the next section) what is HFA Preferred?  House Finance Authority is a designated department of a State government agency in charge of administering and managing grants for homeownership.  Fannie Mae & Freddie Mac give a special discount on mortgage insurance when you originate your loan through a HFA.  Arizona’s HFA is represented through the Industrial Development Authority of Maricopa County.  True homebuyer grants must come through government entities.  To learn more click here to be directed.

That’s Nice: How do these programs affect my payment?

I am so happy you asked!  In fact, thank you for staying with me to this point.

Most of my borrowers discover they will be paying more per month on their mortgage payment using a DPA program than if they had the capacity to fund their own down payment.  It’s important to be educated to know your options and work with a Lender who takes your best interest as their own.  Many lenders shy away from discussing the differences for fear of losing you as a client and potentially their referral partners. 

Let’s review using a FHA loan with the Home in Five and Home Plus programs compared to using your own funds or a gift as a down payment source.  The purchase price is $275,000 and the down payment requirement is 3.5% or $9,625.  This scenario is based on a 660 FICO without the special incentive.  I did not use the special incentive in this case because not everyone will qualify for that advantage.  If you do, you will simply get an additional 1% in assistance.  See below:

There’s no free lunch

Most lenders will tell you to refinance this loan later.  If you’re buying a home getting instant equity at the purchase, then this is a good strategy because ultimately you will build value much faster.  But what if you don’t get that instant equity?  You are stuck paying that additional $166 for the next 36 months.  That adds up over time, $8,080 in interest with less money going towards principle.  Go back to the beginning when I described your grant proceeds on $275,000, the total was $7,961.25.  Essentially, you are still paying for your down payment over the course of 3 years.  It’s a borrowed grant.

Here is a look at a conventional loan scenario taking into consideration the HFA Preferred mortgage insurance rates and the Homeready program.  This is the same purchase price at 3% down.

In this scenario, you’re paying $7,990 in additional interest over 3 years and less towards your principle during that time.

Starting out with Negative Equity

I had a client recently hit a Homerun out of the park using a DPA.  Their home apprised $40,000 higher than the contract purchase price.  Even though they have a forgivable silent second mortgage, we are going to refinance them this summer and lower their payment.  They will have to pay back the grant, but it comes out of the equity they already have.  They will be saving substantially each month and over the life of their loan.

However, for many borrowers using a DPA, they may not get that kind of sweet.  It’s rare for that kind of value to come in and it takes a great Realtor to make something like that happen.  You need to be aware that you will start out in a negative equity position when you use this program because of the silent second lien. 

If you refinance or sell your home, you need to pay off your home for at least to total of your mortgage liens.  For example, take the same $275,000 house using FHA.  The total lien amount will be $277,980 when you purchased the home at $275,000.  For conventional, the total lien amount will be $274,752, which is a little better, but nearly 100% loan-to-value (LTV).  My point to this is your appreciating value of your home will take longer to realize if you want to consider a refinance or selling your home for the shorter future.  You must have some equity for a refinance to make sense.

Down Payment Alternatives

The down payment on a home is not limited to have a large saving account or waiting years to buy a home with 20% down.  In fact, many borrowers have been savings all along and don’t realize they have the resources available to purchase a home.

Your 401k through your employer is a solution.  Most 401k plans allow you to borrow against your plan up to 50% of the vested balance for any purpose.  The money is not taxed and is paid back through payroll deductions.  Some plans even allow the interest you pay on the loan to go back into your 401k or the payments are made pre-tax.  You will need to check with you plan provider.

An IRA can be leveraged if you are a First-Time Homebuyer purchasing your primary residence.  Up to $10,000 can be withdrawn without the penalty if you are withdrawing before you turn 59 ½.  You will still pay taxes on the $10,000 distribution (if a traditional IRA or Roth IRA when the $10,000 exceeds your initial contribution).

Immediate family can also gift you the down payment to purchase a home.  Many times borrowers let their family know their plans and it comes up that they can help contribute to their future.

I want to use the DPA

There is absolutely nothing wrong with using the DPA programs described here.  In fact, if this is the only option for purchasing your home, it is a good solution because ultimately, you still build wealth and fix your overall monthly expenses for the future.  It is just important to understand the differences and how it can affect your overall monthly payment IF you have the capacity to qualify for a home loan without using these programs.  We have not turned anyone away wanting to use these programs and will always make sure to do our best giving borrowers access to homeownership.

Conclusion

If you made it this far, I thank you whole-heartedly.  I have these conversations daily and wanted to make a post about DPA’s for a while to help educate and explain the basics.  The decision to buy a home is not something to take lightly and should be treated with attention to detail.  Fortunately, working with our team, we will manage the details for you so all you need to think about it which home you like best.  Happy House Hunting!

Chris Gonzalez

480-442-4494

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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.