Mortgages: May 2020 Archives


I've heard this story, in all of its variations, at least hundreds of times.

Someone will send me an email and say "They told me not to make my loan payment because I was going to skip one. So I spent the money on something else. Now they're telling me they can't fund my loan and I can't come up with the cash to make this month's payment!"

First off, engrave this into your soul: You will never skip a mortgage payment. The interest accrues every month and it must be paid every month. What many loan providers do is plan to add an amount equal to your monthly interest charges to your loan balance. This gives the illusion of skipping that payment, but you not only made the payment, you're now paying interest on the extra amount you borrowed.

I never tell people not to make their loan payment. At most I will tell them to wait a few days to give the loan a chance to fund. This lets them know it is still a concern, still an item they need to stay on top of. This way, if there's a funding issue they still have the ability to make their payment. I'm pretty certain I've never had a funding issue like that, but I'm also certain if I said anything different, the universe would bite both me and my next client. The universe is hostile and you always want a Plan B (and Plan C if practical).

Here's how it works: At the end of every month, you've got a fifteen day grace period to make your payment (i.e. by the 15th of the following month) before any penalties begin. So if your new loan was funded any time prior to the 16th, everything is at least under control. If you pretend you're skipping a month's payment, you've just added an amount roughly equal to the principle you pay in six months back into your loan (on top of all the other closing costs if you didn't pay them in with cash out of your bank account)

So quite predictably what happens is at the end of every month there is a massive wave of loan fundings to take advantage of this as unscrupulous loan officers pretend this month is free. Escrow gets so busy at that time of month that things get lost in the shuffle quite often. It's for this reason that I prefer to avoid funding loans in the last two or three business days of a month. If you're not trying to pretend your client is skipping a payment that they aren't skipping, things become much easier.

Let's say we fund your loan on the 28th of the month. Actually, this works anytime between the first of the month and the 15th of the next month, but the last few days of the month is typical. You can pay for the interest due in cash or by rolling it into your new mortgage. Either way will get the job done. It depends upon which is more important to you: having the cash from pretending you didn't need to make a payment, or not losing about six months worth of principle payments. By paying this interest, in either case you are covering the payment that would be due for that month.

Here's where it gets a little tricky, but not much. If you fund on the first of a new month or before, the interest paid is for the ending month, and the new loan starts accruing interest immediately. There will be a payment due at the end of that month. If you fund from the second to the fifteenth of the new month, the new loan needs to cover the interest for two months (either by rolling it into your balance, paying it cash, or some combination). In this case, the new loan (or cash you put into the deal) covers the ending month and the new month just beginning. It's also for twice as much money, by the way. This is why some very unscrupulous loan officers can advertise "Skip two payments!" even though there is never a single second on any loan when it is not accruing interest.

As long as everything goes well enough for the new loan to fund by the 15th of the new month, everything is at least under control. Yeah, you might have chosen to roll all the costs into the new loan but that's okay as long as you go into it with your eyes open having made a conscious choice.

But what happens if they tell you "Don't worry about your loan payment!" and then it doesn't fund? (or doesn't fund in time!)

Well, problems. If you're fifteen days late on your mortgage, expect to get hit with a penalty of at least 4% and more likely 6%. Work out the interest rate, and you'll see the interest rate on payments late that sixteenth of the month is 96 to 144 percent!

If that were all there were, that would be bad enough but livable. Usually it puts people a full month behind on their old mortgage. That noise you just heard was your credit score being nuked. I have seen a single 30 day late make a difference of 150 points on the Fair-Issacsson (FICO) model. Plus if you think you had difficulty qualifying for a prime mortgage before, wait until you see what happens after you've got a thirty day late! This usually ends up becoming what subprime calls a "rolling thirty" for several months until you get the extra money from some other source, but A paper (i.e. the good loans) doesn't have a "rolling thirty" category - every single one of those late payments hits you again as yet another late payment within the past 24 months.

Then there's the problem of where you've going to get the money to replace what you've spent because you were told you didn't have to make a payment this month. It's not coming out of some hyperspatial vortex. My clients would have to get it from somewhere. What if they really don't have it?

This sorry little charade that many loan providers play even has an ultimate downside. There is no need to skip a month's payment. You, the client, will get full and complete credit for any cash you put into the transaction or your loan. It may take a little while to get back to you, but you will get it. In the meantime, however, it may spell difficulty for your cash flow. You made that payment but your old lender hasn't yet credited it (or it cannot be confirmed that you made the payment)? You will get the money back when the accounting all finalizes. The reason we tell people they might want to hold off is that quite often it takes a few days between mailing the check off and the time that the old lender admits that they got it. You can't close the old loan off unless you pay the full amount the old lender is asking for right now. If you can't close the old loan off, you can't fund the new loan. Escrow has to pay the loan off in full by the old lender's payoff demand. If more money comes in later, the old lender needs to send it back to you when it does.

So if someone ever tells you not to make your loan payment, ask them if what they really mean is to wait. Because if they really mean "Don't make your loan payment this month": they are risking an awful lot of potentially bad consequences to you, the borrower, if they can't actually fund your new loan. And judging by the amount of email I've had on this subject, it really does happen pretty much every day and to quite a few people per day.

Caveat Emptor

Original article here

Bridge Loans

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One of the things I'm seeing a lot of these days is blanket advice on bridge loans.

A bridge loan is a loan that you take out with the explicit intention of having it be short term. The most common situation is a loan against property A, which you own but plan to sell, so that you can put a down payment on property B (or buy it outright) right now.

The motivation for this comes from the fact that people get paid to do bridge loans, and they are typically very easy loans to do. Frankly, the people making the recommendation make more money by doing the bridge loan than by not doing it, and they are not motivated to do the calculations and legwork to see which is the better deal for the consumer.

When it comes to money, blanket recommendations of any sort are automatically suspect, and usually wrong. Every situation is different, and there can be factors that cause an ethical professional to recommend something in one case where they would recommend against in another superficially similar one.

Bridge loans are no exception. In the example above, the advantage is that they make you a more qualified buyer, and can get you better rates on the loan for the new property. The disadvantage is that their closing costs are just as high as any other loan. So you're spending about $3500 extra plus points plus junk fees (if any). They are also, by definition, cash out refinances. The rate-cost tradeoff for cash-out refinances is less favorable than for purchase money loans. In plain English, they cost more.

The next major issue that arises is that they can make it more difficult to qualify for the loan on the new property, which can often mean that you need to go stated income or NINA when you might otherwise have qualified full documentation, which means you got a higher rate on the new property anyway, and that you're going to want to refinance your new purchase as soon as Property A sells anyway, sending another set of loan costs down the drain. Don't get me wrong, I love to do loans, and my pocketbook loves for me to do loans, but it's a good loan officer's job to look after your interests first.

Finally, choosing a bridge loan can force a choice upon you: A good loan that puts you in the position of having a need to sell within a specified time frame, and a mediocre loan that may not. The best (lowest) rates are for short term loans. Always have been, always will be. However, if the market sours, this can cause you to either accept an offer you would not have otherwise considered, or flush another set of closing costs down the toilet, when if you had chosen the mediocre loan, you would have been okay indefinitely.

Let's crunch some numbers. Let's say you have a property currently worth $250,000 that you bought for $125,000 and have paid down to $100,000. You want to upgrade to a $400,000 property now that your promotion and raise have settled in.

The first thing you do is pull cash out to 80 percent. On a 30 day lock of a 30 year conforming fixed rate loan, assuming you've got good credit, when I originally wrote this was about a 6.5 rate without points, and you'll actually get about $96,500 of that $100,000 you take out. I looked at shorter term fixed rate loans as well, but with the yield curve inverted right now since you're planning to sell, anything without a prepayment penalty is about the same, and a prepayment penalty is contra-indicated, as it means you'll have to pay thousands of dollars when you do sell.

You take and put that $96500 down on a new home purchase loan on a $400,000 home. It's over 20% down, so no PMI concerns, and no splitting into a second loan. But because you've got that $200k loan sitting over there, now you have to go stated income on the loan for the new home.

Actually, at this update, I don't know of any stated income loans. What that means is there's no way to qualify without coming up with more cash or waiting for the first property to sell. This means moving twice or hoping your buyer will let you lease the property back long enough to find a new property. Or simultaneous closings, a massively stress-inducing plan, because you're betting your ability to close on someone else being on-the ball.

But when we had it, stated income was one way of making this work. This means you traded no verification of income for a higher rate/cost tradeoff. In the example we're using, your rate would have been about 6.75 without points. Soak off another $3500 in loan costs, plus purchase costs of maybe another $1000. You now have two loans, one for $200k at 6.5 and one for about $312,000 at 6.75. Now the original home sells. Let's say you got full value of $250,000. You pay 5% in real estate commission, and maybe 2% more in other costs. That's $17,500, so you get $32,500 in your pocket. You have three choices, two of them productive. You can 1) Spend the money, 2) Invest the money, or 3) Use it on the other mortgage. A paydown, where you just plop the money down and keep making your same old current payment is a good idea (Unless there's a "first dollar" prepayment penalty), but most folks are obsessed with lowering their payment. So they take that $32,500, and of which $3500 is loan expenses, and (because now they can do full documentation), they end up with something like a $283,000 loan at 6.25 percent, assuming rates don't move. Total cost of loans: $10,500 assuming you pay no points for any of your loans. Perhaps possible for someone with above average credit. Not likely if your credit is below average.

Suppose instead, that you just leave that $100,000 loan sit on your original property. You're still going to have to do stated income on the new loan on the new property. But instead, you go with a 80 percent first, 15 percent second (another thing you can't do at the update because no second mortgage holder will go over 90% loan to value ratio) because you can come up with $25,000 until the first property sells. Same 6.75 rate on the first, and the second is an interest only at about 10.25, just to use the same lender whose sheet I happened to pull from the stack for the exercise. Loan costs, $4000 without points, which I priced the loan to avoid. First house sells, you get $132,500, replace the $25,000, and pay off that second, leaving you a $320,000 loan and about $47,500, holding cost assumptions constant ($1000 in non-loan costs). You could do a paydown, leaving $272,500 balance on a 6.75 loan, or you could take $3500 in closing costs and refinance to 6.25, just as above, leaving a balance of $276,000 if you don't pay any points. Total loan costs, $7500 and you only have to avoid paying points twice (once, as opposed to twice, if you take the paydown option. It takes a little under 37 months to break even on your interest savings). Furthermore, in less than hot markets, it gives you greater leverage with your seller to pay some part of your closing costs: "Do this, or I don't qualify". They have the home on the market for a reason, and they can help the buyer in hand or they can hope for another buyer to come along.

In this example, not doing a bridge loan saves you about $6500, less the additional interest (about $512/month) for the second mortgage until your first home sells, but plus approximately $541 per month interest every month between the time you initially refinance your original property and the time it finally sells, a longer period of time. Plus one set of possible mortgage points. So it's not difficult to construct scenarios where it's a good idea not to.

Let's look at a different scenario, however. Let's say instead of upgrading, you're already in the $400,000 home, and looking to downsize to a $100,000 condo. Furthermore, let's say you bought for $200,000 and are now down to $160,000 owed, just to keep the proportions consistent. You borrow out to $265,000 (paying $3500 in loan costs), which you qualify for full doc at 6.25. You then pay cash for the condo (including $1000 for purchase transaction costs, and you've still got $500 in your pocket). Furthermore, an all cash, no contingency transaction is a powerful negotiating tool for a seller to give you a good price. Then when your original property sells, costing you say 7%, or $28,000, in selling costs. You net $107,500 in your pocket. If you did no bridge loan, let's still assume you can come up with $25,000 on the short term, and you still qualify full documentation. Your rate on the condo is 6.375 without points, holding assumptions consistent. Then you sell the first property for the same $400k, paying the same 7% ($28,000) and paying off the $80,000 loan on the condo as well as replacing the $25,000. Net still $107,500 in your pocket, less additional interest charges for a little longer period, but you cut your stress level and put yourself in a stronger bargaining position, which is likely to be worth doing.

There are any number of reasons and factors to do a bridge loan or not to do a bridge loan. You may not have a minimum down payment without a bridge loan. That's probably the most common, as not all properties and purchases are eligible for 100 percent financing (at this update, the only way I know to get 100% financing is with a VA loan, and some require as much as a forty or even fifty percent down. The way a necessary transaction is structured. The presence or absence of 1035 exchange considerations is often a factor. Your credit score may limit you, or your ability to qualify full documentation may dictate the advantage lies in a different direction. Every situation has the potential for factors that may dictate an answer other than that given by pure numerical computation, and there are therefore, no valid blanket answers to the question of whether or not to do a bridge loan.

Caveat Emptor

Original here

What is a good interest rate for a house that is for someone with low income?

Well, if you make enough to afford the property, your income isn't a factor on the interest rate you get! You either qualify or you don't. Banks may charge an additional fee for low loan amounts, but your income is not the issue, except as to whether or not you qualify for the loan as it is submitted. The lender does not care if you just barely scrape through, or if you have a hundred times the minimum income to qualify. Kind of like there's no such thing as "a little bit pregnant." You either are or you aren't. Same thing with loans: You either qualify or you don't. It's possible you might qualify for a better program than you got, or that you might qualify with another program where you don't qualify with this one, but those aren't questions that the underwriter or the underwriting process are going to address. They're questions your loan officer needs to get right before the loan is submitted.

There may be programs you are eligible for, such as Mortgage Credit Certificate or a locally based first time buyer assistance program. These programs can make it easier to qualify, in that they effectively raise your take home pay, they keep you from having to borrow so much, or even that the save you from the choice of PMI or splitting your loan. However, be aware that every single one of these programs requires full documentation qualification for a loan that's fixed for at least three years and fully amortized, or fixed and interest only for at least five years. Stated Income and negative amortization loans are not (and never have been) permitted with any of these programs that I am aware of. The idea is that you buy a property you can afford and stay in it for a long time, not a property you cannot afford, and get foreclosed upon. These programs also have income limits that many people might not consider "low." Up to $96,000 per year here locally can still qualify - the big concern is whether there's money still left in the budget for these programs when your application is ready for approval.

Nobody is really going to give you money at a lower interest rate than someone else, just because your income is lower. If this means you have to settle for a condo when you want a single family detached property, or a less expensive home than you would like, well, that's what everyone else has to do. There is no special magic wand that enables low income people to stretch beyond their normal means in purchasing a home. There's a lot of unscrupulous people who have gotten paid a lot of money pretending that there is, but there isn't. Stretching beyond your means is pretty much a guaranteed disaster. If not now, then a couple years down the road. Better to get it fixed in your head as to what you can really afford and live within that.

Caveat Emptor

Original article here

Really.

I know that most people who read that title are replying "no kidding" but you would be amazed at how many people act like there is such a fairy godmother.

I got an email yesterday that said, basically, "Help me! I bought with a prepayment penalty and my payment is too high. I've got a 100% loan at 7.125% and a three year prepayment penalty, and I need to drop my payment by at least $500 per month!" As I explained, the only honest responses that really solve this problem have to do with increasing the income, decreasing the other outgo, or, as a last resort, getting rid of the property, because he's not going to get a loan like that. They don't exist. They never did, really, but negative amortization loans allowed people to fool themselves into believing they existed.

The guy referenced above is stuck in a negative amortization loan because it was the only way to afford the property he wanted. He treated it like a fairy godmother waving her wand, and didn't ask what happens on the 12th stroke of midnight when the loan recasts.

Anytime you are signing up for anything other than a fully amortized loan at a fixed rate of interest, you should ask "What happens next?" What happens when the initial period of lowered payments ends? Because each and every one of these loans has a boosted payment when that happens, and many, like negative amortization loans, are adding thousands of dollars onto the balance of your loan whenever you make that special low payment they're so proud of! So in three years, when the loan recasts, you owe about 10% more than you did to start with, and a shorter amortization period means your payments go up even more to reflect that. If you couldn't afford the loan originally, how are you going to afford it later?

(I am not saying don't get any other type of loan. I'm saying make sure you understand what happens when the adjustments start. For my own use, I am a big fan of the 5/1 hybrid ARM, but I understand what happens after 5 years, and have always refinanced before then.)

Real Estate Mortgage Loans are something you've got to get right in the first place. Lenders often allow a higher loan to value ratio for purchase money loans than anything else. Put into plain English, if you bought with a loan for ninety percent of the value of the property, I might not be able to refinance it at all, anymore. If Fannie or Freddie own your current loan, then we can likely refinance you under restrictions noted above, but most of the rotten loans were with Alt A or subprime lenders, not Fannie or Freddie. Second, there are closing costs in every loan. Closing costs are around $3000 or so, not counting origination and any discount you may decide to pay to get a lower rate. You can pay these costs out of pocket, you can pay them through yield spread (and equivalent things) by accepting a higher rate - making it harder for a refinance to get you a lower rate - or you can roll those costs into your balance, meaning that the loan to value ratio gets worse. Even a few dollars over a given level's cut off goes to the next higher level, getting worse pricing. If you were at 86.2 percent loan to value and you go to 87.2 percent, we've still got a ninety percent loan. But if you were at 89.1 and you go to 90.1 (or even 90.001), that puts you into the 95% loan to value bracket, with higher pricing and I've only got one or two lenders who will of do it at all, even purchase money. Unless your current loan is with Fannie or Freddie, I can't think of anyone right now who'll do a 95% bracket refinance loan at all. Not to mention that the appraisal may not come in and there's nothing your loan officer can do about it. So if you start with a bad loan, the practical result may be that you cannot fix it by refinancing because lenders won't do it.

So before you sign on the dotted line, make sure you understand all the nuts and bolts of your loan. Keep asking the question "What happens later?" If you don't understand it, or it is too complex, get some disinterested professional advice. Chances are that something is going on that's going to be bad for you later on. Lenders don't want to compete on price if you don't make them, and they know most people choose loans based upon payment, and they know how to play all of the games with payment and interest rate to make their loan appear good to the casual public.

Ask the hard questions before you sign up. Unfortunately, with new lending environment the best realistically possible answers aren't as good as I'd like, but the answers that prospective loan providers give are still instructive if you pay attention.

Caveat Emptor

Original article here

We have several rental properties that we own (more than 10). When we were younger, before we got married, we both moved around a lot and bought houses, moved, stayed a year or so and did it again. I of course don't have to mention why we did this (no money down, low fixed rates, etc.) However, now I am running into a dilema. I am finding that no one wants to refi or do purchase money loans now that we have 10+ mortgages. I need good rates to make my cash flow work. I have recently herniated one of my discs and have been out of work for almost 3 months, so I need to take money out of our house that is paid for, but no one wants to do it. Any suggestions on how to get around that? My credit scores range from 763-805, so that is defintaely not the problem. Any advice would be greatly appreciated as I am down to crunch time in needing to get some money.
Tough situation.

The reason for this problem is that whereas nationally, vacancy rates are much higher, and here in high cost California they are only running about 4 percent, the bank will only allow 75 percent of rent to be used in the calculation of whether you qualify or do not (debt to income ratio). Furthermore, on the liabilities side they charge the full payment, taxes, and homeowner's insurance, as well as maintenance. To "pile on", Fannie Mae and Freddie Mac won't buy loans where the applicant has more than ten loans, period. But note that this is ten loans, not ten properties.

Here in the high cost areas of California there was a while where it was unheard of for a recent purchase rental to be turning a positive cash flow, at least according to "lender math". But for properties purchased a decade ago here as well as right now, and nationally in many markets, there are people making money hand over fist on rental properties whom the bank believes must be cash destitute. There is no way they will qualify for a mortgage loan without tweaking something.

There are two main ways to solve the problem.

10 mortgages (assuming you still own the properties) gives one serious status as a real estate investor. The loan should then be able to be done. Not necessarily A paper, but subprime with that kind of a credit score and a prepayment penalty will give them comparable - perhaps even better rates. Furthermore, on investment properties, there's a minimum of about a 1.5 point to 2 point hit on the loan costs just due to the fact that it is investment property. So refinancing an investment property is not something you want to do often. If you can't go 10 years between refinances, something is probably wrong. Especially given the extremely narrow spread between long term loans like the 30 year fixed rate loan and shorter term fixed rate hybrids, for investment property a 30 year fixed rate loan is likely the way to go.

The alternative is to go with a commercial loan. Commercial loans are much easier than residential, and they will allow a real estate investor to qualify where they wouldn't under residential rules. However, the rates are both much higher and variable ("Prime plus margin") rather than fixed.

But the key part is "real estate investor."

This is a business. You're going to need an accountant to attest to the fact that you've been operating this business at least two years. But that gives you standing as at least partially self-employed as the operator of a real estate investment business.

Which once upon a time gave you an out to do stated income, possibly even A paper. Unfortunately, that is no longer the case - one more instance in which people who abused stated income really ruined the market. You're going to have to state that you earn more income than you do. There are no longer stated income loans available from any source that I am aware of. Given the environment today, a good loan officer looking to cover themselves is going to want you to acknowledge that you can make whatever the payment is really going to be. I don't care if you need $6000 per month to qualify and you tell me that you make $12,000 per month, or $120,000. Any time you are looking at stated income, you're looking at a situation that is vulnerable to abuse, both from the point of view of a consumer being put into a loan they really cannot afford, and from the point of view of a bank lending money based upon a credit score and source of income that really may not be there. This one is especially vulnerable to the latter concern in the current market, and I would likely take a real careful look at any bank statements that pass through my hands to make certain it's not patently disprovable. If it makes a borrower uneasy, well half of the reason is to protect them. Stated Income may have been colloquially called "liar's loans", but that is not what they are intended for, and in this case you are intentionally overstating income in order to qualify under unrealistic underwriting rules.

The second approach was NINA - a No Income, No Asset loan, also known as "no ratio" - meaning no debt to income ratio. These were much easier to do for the loan officer, as they're completely driven off credit score, but carried still higher rates, and unfortunately, despite these being less fraudulent, I no longer have any idea of where to find one outside of "hard money" loans carrying interest rates above 12%.

The only general solution available today is a portfolio loan. If you really do make a million dollars a year from something else, you can get a loan on any number of properties from a lender who holds the loan in their own name rather than trying to sell it to Fannie and Freddie. This begs the question of how you make the money or where it comes from, but it is possible. Nor can your lender de-fund existing loans unless it's for a reason allowed in the Note (loan contract)

There always was serious potential for abuse in this situation, a potential that lenders were willfully refusing to see back in the Era of Make Believe Loans, but now the pendulum has swung too far in the other direction. The lenders are now so paranoid about these loans for which there is good reason and a valid market for existence, that these markets are going completely unserved. Self-employed people and commissioned salesfolk have to file taxes, also, and tax forms are the preferred method for documenting income. Nonetheless, because there are significant deductions that would not otherwise be allowed due to the fact that these professions are largely paying bills with "before tax" money whereas most folks are paying with "after tax" money, people in such professions needed the alternative documentation methods in order to qualify for loans. With those alternate methods all but non-existent now, people in many professions (including real estate agents and mortgage loan officers) are finding it difficult to get loans at all. There always was the danger of talking yourself into a loan that you could not really afford, but while lenders were being willfully blind to it until recently, now they've got an obsession with avoiding that market completely. I am sure that business models will spring up allowing that loan market to be served within a another year or two, but in the meantime it's going to be really hard for people who are confined to that market to get a loan.

Caveat Emptor

Originally here

Thanks again for the terrific posts. I've learned more about mortgages in the past two months than I ever dreamed I might.

I am looking to buy my first home soon, and have myself in a good credit position to do so. My credit score is over 800 and I have no back-end debt - no car payments, alimony, student loans, etc. My annual salary is well over $100K, and while my down payment will not be as much as I would like, I should be able to put up 20% of the purchase price.

Before I shop for a loan, I have some questions and would appreciate your insight.

1. Do monthly "subscriptions" such as landline phone bill, cable, internet, cell phone, etc. come into consideration? As I have no cell phone and no cable (and don't intend to get them), I see my monthly expenses in this regard as significantly lower than most other borrowers.

2. Do my retirement savings come into play? I have saved conscientiously for several years and between IRA's and pension funds (fully vested) I have a significant amount put away.

Thanks again for the teachings

Gosh, I didn't think a dream client like this existed any more!

In general, there are only three instances when reserves really come into play. They are:

1) Stated Income. Since people in this category were not documenting their income, for a true stated income loan they are looking for evidence that these folks are living within your means. The measurement that has evolved is six months PITI (Principal Interest Taxes and Insurance) in a form where you can get to it - savings accounts, investments, something. If you have a retirement account, such as a 401, IRA or similar, most lenders will allow you to use a discounted amount, most often 70 percent, as the money would require the payment of taxes and penalties. Roth IRAs may be treated differently, as the rules are different. There were Stated Income Stated Assets loan programs, but when you get right down to it, those loans look more like heavily propagandized NINA (No Income, No Assets, aka No Ratio loans) than they did a true Stated Income. (at this update, I am unaware of any lender who is actually funding stated income loans of any sort)



2) Payment shock. If your payments are going to be much higher than rent was (or previous payments were), many lenders will require two to three months reserves of PITI payments in reserves.



3) Cash to close. No matter what the loan, the underwriter is going to be looking at the loan to make certain that you have the cash to close, and any reserve requirements are in addition to this. If your loan is going to require a certain amount of cash, either in the form of down payment or loan costs or most often, for prepaid interest or an escrow account, then the underwriter wants to see evidence you've got it. It's no good for the bank for the loan to be approved, the documents printed and signed, the notary paid, and then the loan doesn't close because you didn't really have the cash. Seller paid closing costs are getting to be a really touchy point with many lenders, by the way, as they indicate the property may not really be worth the ostensible sales price.



In any of these cases, the underwriter is going to want to see evidence as to where the money came from. They want to know that you've either built it up over time or have had it for quite some time or that you can document where you got it from. What they are looking at with these requirements is the possibility that you got a loan from somewhere that you're going to have to pay back, and the payments on which may mean you no longer qualify under Debt to Income ratio guidelines.



Mind you, it never hurts to have money socked away. But it's not worth any huge amount of contortions to prove. For A paper lenders, the guidelines are razor sharp, and excessive reserves are not a part of them. You've either got the required amount or you don't, and the fact that you have $100 million in investment accounts isn't relevant - and it may cause some underwriters to start wondering why you're not paying for the property in cash or putting more of a down payment (Anytime you give an underwriter more information than required, you run the risk that they will ask you difficult questions about it). Some subprime lenders may approve a loan they would not otherwise have approved, or maybe offer better terms than they might otherwise, but there have been enough adverse experiences with this that it is becoming more rare.



Monthly subscriptions (utilities, etcetera) are why the permissible debt-to-income ratio (DTI) isn't higher. You can cancel cable TV, you can cancel dish network, you can cancel pay per view, you can cancel magazines, although most folks want phone, gas, and electricity. Utilities etcetera do not count against debt to income. Only the payments on actual debt count.

Caveat Emptor

Original article here

if our house is being foreclosed, can they take our retirement or make us sell our cars?

we both have (1-2 year old) cars that are paid off. Can they take our cars or make us sell them to pay them some money?
Can they place a judgment to take our retirement 401k?

Depends upon the law in your state, and whether the loans you have are subject to recourse.

Here in California, purchase money loans are not subject to recourse. Providing you don't commit fraud or any of the other things that void this protection, once they take the property, that's it. If your loan was purchase money, used to buy the property, they shouldn't be able to win a deficiency judgment after foreclosure.

However, this isn't likely to be as innocent a situation as all that. Can't make the mortgage payment, but have two vehicles less than two years old which are all paid off? That says this was likely to be a "cash out loan" to me!

I am unaware of any circumstance under which a "cash out" loan is not full recourse. It's not like you did it by accident. Now, if as I suspect may also have been the case, false promises were made to you as to your payment, interest rate, etcetera, that's a matter to take up with the people who did your loan. Actually, probably better to have your lawyer take it up with their lawyer. But that doesn't mean the current holder of that loan isn't entitled to their money.

If, as I suspect, you "cashed out" to pay for those cars, then you've got a full recourse loan, and they can pursue a deficiency judgment. Whether they will or not is subject to several variables, most significantly whether they think it's worth their while.

Once they get a deficiency judgment, talk to a lawyer about whether they can get court approval to take your vehicles. But they're going to get the deficiency judgment if they try. Cash out loans are pretty cut and dried. Unless there's something reasonably unusual going on, for which consult a lawyer, you're likely to be better off agreeing to it in the first place, rather than forcing them to pay attorney's fees and having the judgment say you've got to pay their attorney fees as well as your own, in addition to the base deficiency. My understanding is that safe harbors for assets in this case are intentionally as few as the legislature can make them.

One of those few safe harbors, though, though, is likely to be retirement accounts. Retirement accounts are a protected asset class, and while I suppose it's possible for a creditor to get at them, I've never heard of a case of them being successful, at least not until you start withdrawing from those accounts. Once it gets withdrawn, of course, the money you withdraw is ordinary income, and therefore, fair game. This can lead to the sort of situation computer programmers call a "deadly embrace". They can't get at the retirement account as long as the money is in there, you can keep the money in the retirement account, but if you try and withdraw it for use, they can then get at it. They can't get it until you try to use it, but they can get it if you do. Usually, people in this situation negotiate a settlement.

Caveat Emptor

Original article here

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This page is a archive of entries in the Mortgages category from May 2020.

Mortgages: February 2017 is the previous archive.

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