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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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10% Down NO PMI

Low Maintenance Solution

No PMI with 10% down

The “Low Maintenance” solution to mortgage planning

A lot of loan officers shy away from complex ways to truly give a client the benefit of better terms for the long haul.  Setting up a home loan for someone is an art and looking at a Client’s long terms goals and strategy is taking the colors given and working to make something perfect.  We recently did this and it was awesome!

The Second Mortgage

Purchase money second mortgages are making financing terms attractive for prospective homeowners that are generating great income but do not have all the cash for a 20% down payment.  Borrowers want a lower monthly payment without the private mortgage insurance (PMI – more on this topic coming soon!).

Usually the solution, from the lender, is to “refinance later” which comes with a cost.  What about a borrower having 10% for the down payment?  This is how a purchase money second can help you save monthly upfront and for the future.

The Details

Guidelines require a combined loan-to-value (CLTV) of 90% – 95% for a Home Equity Line of Credit (HELOC) that will give you the additional funds for the remaining down payment.  The borrower must have at least a 10% down payment on the purchase price of the home.  See the scenario below:

Both scenarios based on 740 FICOs as of 6/12/2018, includes PMI factor

Combined First & Second Mortgage

Purchase Price: $500,000

Borrower Down Payment 10%: $50,000

Purchase Money Second Loan 10%: $50,000

First Mortgage Loan Amount: $400,000

Rate 5.25%

First Mortgage Payment PITI: $2,631.31

Second Mortgage Payment: $319.39

Total Housing Expense: $2,950.70

Scenario 10% down ONLY

Purchase Price: $500,000

Borrower Down Payment 10%: $50,000

First Mortgage Loan Amount: $450,000

Monthly PMI $138.75

Rate: 5.00%

First Mortgage Payment PITI & PMI: $2,990.70

Results

Notice how the payment is virtually the same putting 10% down and using the purchase money second mortgage option compared to paying monthly PMI.  Remember, the additional down is lowering the monthly principle and interest on the first mortgage making the payment lower, despite a slightly higher interest rate.  In addition, once the PMI drops off at 78% LTV, per the Homeowner’s Protection Act, the mortgage payment, putting 10% ONLY down, drops $138.75.  When the second mortgage is paid off using the first and second HELOC option, the payment drops $319.39.

This set up is designed for the homeowner that wants flexibility to control their housing expenses by paying additional towards the principle and reducing their monthly expenses rather than wait for equity to refinance down the road.  Remember, there is a cost to refinance your home loan, no matter how great the deal is.  This solution is what I consider a “Low Maintenance” mortgage loan.

Updates

The rates and costs described are meant to illustrate the differences and savings in payments even if an interest rate was higher for the First and Second Mortgage option.  It does not represent the current market rates and will vary based on the borrower’s qualifying factors.  This blog post was published after it’s original disclosure date.

Disclosures
*Interest rates and annual percentage rates (APRs) are based on current market rates 06/12/2018, are for informational purposes only, are subject to change without notice and may be subject to pricing add-ons related to property type, loan amount, loan-to-value, credit score and other variables—call for details. Rate data is for illustrative purposes only.  Subject to underwriting approval. Application required: not all applicants will be approved. This is not a credit decision or a commitment to lend. Additional loan programs may be available.
First Scenario with Second Mortgage Principal and interest monthly payment estimates (30 fixed): 359 payments of $2,208.81, and 1 payment of $2,212.86 Second mortgage Principle and interest payment estimates (10-year interest only, 20 year fixed, 30 year amortization) 359 payments of $276.10 and 1 payment of $277.94. 
Second Scenario 10% down only Principal and interest monthly payment estimates (30 fixed): 359 payments of $2415.70, and 1 payment of $2,413.59.
Payment estimates do include amounts for taxes or insurance and assumes mortgage insurance is required for the loan (10% down ONLY scenario), your actual payment obligation could be greater. If an escrow account is required or requested to cover any of these items, the monthly payment amount will increase. APR reflects the effective cost of your loan on a yearly basis, taking into account such items as interest, most closing costs, discount points (also referred to as “points”) and loan-origination fees. One point is 1% of the mortgage amount (e.g., $1,000 on a $100,000 loan). Your monthly payment is not based on APR, but instead on the interest rate on your Note.
These rates also assume the following: 1) Property type/use: Single family residence/owner occupied; 2) Loan-to-value (LTV): 90%, or as user selected. LTV = ratio of loan amount divided by the purchase price; 3) Down payment: 10%; 4) Rate lock period 30 days; 5) Base Loan amount: $400,000 & $450,000; 6) Discount point (s): 0 ; 7) Lien position: First lien; Property location: Arizona; Loan term: 30 year fixed product Conventional.

Chris Gonzalez
(480) 442-4494
info@azmortgageprofessional.com
www.azmortgageprofessional.com