Relocation Loans and Developer Issues

From an e-mail:

I live in (City 1) and recently signed a work order on a semi-custom new construction house in (City 2). My wife and I make a combined 120K income and still can't afford a decent place in City 1. It was preapproved rather quickly from both the builder's mortgage company and a few outside companies and everything was moving along splendidly, until my employer decided to refuse to transfer me (something we had mutually decided on back in April). To make a long story short, the house will be built and ready to close in early November and 2 of mortgage companies are asking for a Relocation letter from my employer. Seeing as how I make 66% of the 120K combined salary, my plan is to tough it out here until I find (1) a job in City 2, or (2) a job here that will transfer me to City 2. My question is, if I can't supply them with a relo letter am I dead in the water? Do I have to scrap the loan (primary residence) and try to get a second home or investment loan? The broader question here, is how critical is any piece of documentation? Obviously W-2s and bank statements can be deal breakers, but what about the other stuff? I.E. relo letters, proof of homeowners dues, etc etc.

First off, you have an obvious potential issue with your current employer. If your work order was predicated upon a promise of transfer, you may have a case against them if you want one for the amount of any money you're out. Consult an attorney, preferably one that is licensed in both states. Obviously, this poisons the atmosphere, so you may not want to. On the other hand, you may have decided by now that you are done with them one way or the other.

Second, getting to the item of contention, the relocation letter. Every lender's guidelines are different. You didn't say how many lenders you had applied with, but few people apply for more than two loans. Any item the underwriter asks for can be a deal-breaker, especially if you can't provide it. What the underwriter is looking for is a coherent picture of someone who is going to be able to repay the loan. If the loan underwriter doesn't see a coherent picture of you being able to repay the loan under the circumstances it was submitted under, the loan will be declined. The underwriter can ask for anything they want. They can ask for proof your father gave birth to identical triplets, if they think it has some bearing on the loan. If you cannot furnish them what they want, and your loan officer can't shake an alternative or an exception out of them, the loan is dead.

They're not likely to ask for proof of something impossible and irrelevant like my example. Legally they probably could - Everybody has a biological father, so it's not discriminatory on the face of it. They're certainly not going to violate anti-discrimination lending laws by asking for something based upon race or sex. But they're in the business of making loans, which in many cases make more money for the developer than the sale. However, if the underwriter approves loans that go sour, they can expect to be held accountable by their employer, and so they require and are permitted a certain degree of necessary latitude on additional requirements in order to do their jobs. If I tell an underwriter that I make $2 million a year in the stock market, I'd better be able to furnish proof. If it's not relevant to the loan, I should keep my mouth shut about it because it's asking for trouble. Never tell an underwriter anything not absolutely necessary for loan approval.

It's a horrible lie about people from Missouri, but I tell people to think of underwriters as Missouri accountants. Their favorite sentence is, "Show me on paper." All loan approvals are based upon the potential borrower and their current status quo. In other words, the situation as it is, not as you hope it will be someday. Yes, when doing Verification of Employment they ask about prospects for continued employment, but that's just to establish that the employer isn't willing to admit they're about to fire you. They know that in the real world, people get told "Yes, we're going to keep Mr. X here forever" and next week Mr. X is applying for unemployment.

What the underwriter is looking for is a coherent picture of you occupying the property and working at your current employer. You're working in City 1 and living in City 2, which are not within daily commuting difference, but you applied for the loan as intending to make it your primary residence.

Given that they are requiring a letter of relocation, you have several options. I know it has happened in the past that employers who were not willing to relocate employees were nonetheless willing to write letters that said they were. This is stupid. This is fraud, and if the loan becomes non-performing the employer could potentially become liable for whatever the lender lost, not to mention that a lot of your protections as a consumer go out the window. Second, they could sign a letter that says you are going to be telecommuting from your new home. Yes, your job is in City 1, but you could legitimately be living in City 2 and still employed and doing your current job. Bingo, happy underwriter (probably). If your loan officers aren't complete idiots they will have asked you about this, so I presume the answer is no.

So now we're bringing in other issues as well. Now you have a husband living in City 1, while the wife and new home (and I presume wife's job) are now in City 2. Fact: husband needs a place to live in City 1. "What's that place to live going to cost him?" they ask. They take this answer and add it to the previously known total of your other monthly payments. Because you now have more in known monthly expenditures, now you may not qualify for the loan you were "pre-approved" for. Pre-approval doesn't really mean diddly-squat, and the developer knows it, so they likely required at least a decent sized deposit from you, so if you don't get the loan, you don't get the house, and you may have a substantial forfeiture. See my first paragraph at the start of the article. Furthermore, some underwriters may see a potential divorce situation here, so they may ask for some kind of testimonial from third parties that you're not getting a divorce.

Now, if you had a decent agent, he likely wrote your offer "contingent" upon your relocation. Unfortunately, if you're buying from a developer, your agent probably works for the developer, and so didn't do this. You may or may not have a case against the developer and the agent. Consult an attorney, but this is one area of many where buyer's agents really pay off.

(Even if they're inclined to trust me, I do not want to represent both sides in a sale, and will usually insist that one side go get another agent, or at least sign a release indicating that they realize I am working for the other party, not them, and have no responsibility as to their best interests. As your experience indicates, too many actions are a potential violation of fiduciary duty to one side if you do them and to the other if you don't. There are some agents who get greedy and do both sides, but usually they make their attorneys very happy. If your agent wants to do both sides of the transaction, that's never a good sign.)

However, what I suspect you really want is the house and the loan you signed up for. So I'm going to go on that presumption.

You make $10,000 per month. You may be able to get a friend to rent you a room in their home in City 1 for fairly cheap, so that there is not enough difference so you don't qualify for a loan. Several years ago before I met my wife, I rented a room out cheap to a friend who was in a situation not too different from yours. "A paper", you are permitted up to about about a forty-five percent debt to income ratio, and it can go higher if you have a high enough credit score such that DU or LP (Fannie and Freddie's automated loan underwriters) will buy off on it.

You could go to a different loan type, carrying a lower rate and hence a lower payment. Unfortunately, the debt-to-income limits on these are lower. Unlikely to work.

You could go to a "second home" loan. Unfortunately, the standards on those a a little tighter, and there may be an additional fee of a quarter point or even a half, and you're still going to have to show the underwriter a residence in City 1, which means the payment qualification issue raises it's ugly head here, also.

Finally when this was originally written you could have gone to a sub-prime lender (where maximum Debt to Income ratio can be higher) or done a "stated income" loan. Both of those options are now non-existent. If you were working with a broker's loan officer as opposed to a direct lender or packaging house loan officer, either would be no sweat - you might not even have to do another application. The broker would simply withdraw your loan package and submit it elsewhere. Unfortunately, from a subsequent email, I know that you're not working with any brokers. Well, the developer probably has a sub-prime lender on tap as well, so that may be a low stress option. On the other hand, if they are a different branch of the "A paper" lender, they may not be able to do your loan either. Or, if you're lucky, the developer is acting like a broker in the first place rather than a direct lender.

One of the great rules of the business is that you cannot go from a higher documentation loan to a lower documentation loan on the same borrower at the same lender. If I submit to lender A "full doc," I cannot then later submit it to lender A "Stated Income." The reasons for this should be fairly obvious, and this is a no brainer without exceptions across the business.

For brokers, because the paperwork is in their name and not the lenders in the first place, this means no new reports. But since you're not working with brokers, what this means is that you're likely to need a completely new set of reports from the appraiser on down in the new loan company's name. This may be done on a retyping basis if you are lucky, or you may have to pay for completely new ones.

I strongly advise you NOT to quit your job, unless someone a lot more familiar with your situation and prepared to take the consequences of being wrong tells you otherwise. Here's why: You quit your job. Now you are unemployed. It does not matter if you've been doing what you're doing for forty years. Right now you are unemployed. As things currently sit, you do not qualify for the loan. Even if you've got a written offer of employment somewhere else, many lenders will not approve the loan until you have a pay stub to show for it. Since this means waiting several weeks at least, it's almost certainly outside your window of opportunity.

One final issue: here in California, it's illegal for a developer (or anyone else) to require that you do the loan with them in order to get the property. But it happens anyway (I've been told point blank by more than one developer's agent that if the client doesn't do the loan through them, the purchase contract will be canceled. Many others won't tell you point blank, but they will throw obstacles up until you give up on the other loan), and it's a long hard slog to prove legally and it costs you thousands and you still don't get what you really wanted in the first place: the house you signed an order for. I am not certain the practice is even illegal in City 2, where you're buying (although from some things I've heard about that state's practices, I think it's probably legal). So you probably want to be certain you're not fighting the developer on this by finding your loan elsewhere. Unfortunately, you've already (probably) put a deposit down and you said in subsequent email that the home has appreciated while it was being built, so the developer has incentive to throw roadblocks in your path. Your transaction falls through and not only do they get to keep your deposit but they can turn around and sell the home for more. Preventing this kind of nonsense is what buyer's agents are for (it also gives you someone easy to sue if something goes wrong!). Unfortunately, most developers will not cooperate by paying a commission to buyer's agents for precisely this reason, which means that the average buyer will decline to pay an agent out of their own pocket and try to do the transaction on their own, which leads to situations like this.

Best of luck, and if this does not answer all of your questions, please let me know.

Caveat Emptor

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