The Anatomy of a Dead Deal...

[Note: This was sent to a realtor I work with who decided to try and tell me how to do my job. (Implied in the wording of the question she sent me.) To set the background a bit, this is from a deal we were working on from our lead system which ultimately cannot work at the present time. All names are changed to protect the parties involved, the borrower will be referred to as Janet and the realtor as Alexa.]

Hi Alexa:

First of all, the client's credit is bad due to the situation of a rather messy divorce. The only way we could do this for her in the absence of good credit is to go FHA and there are no FHA stated income programs. If there was an FHA stated income program (and there is not), there would still be a 3% down payment requirement and she does not have that $$$. But even if there were FHA options here and she had the down-payment $$$ -either in her own account or that someone could gift to her- the issue of stated income or any other no or low doc program still revolves around whether or not she can make the loan payments. Otherwise, we are selling her on something she cannot do and a foreclosure will be inevitable. Ethically speaking, even if we could do that we should not.

Stated income works for those who have the money to pay but for some reason cannot get a loan the conventional way. For example, a self-employed person who takes a lot of deductions to lower reported income for tax purposes. Or it is helpful to help someone who has the money to make the payments but does not fit the DTI ratios that are required on many loan programs. In other words, they may not meet the ratio requirements that the banks set for so their income is stated higher to meet those ratios. (I am refinancing a relative right now and her loan has been approved subject to standard conditions with stated income fitting these precise parameters.) For those who have additional problems in proving that they have adequate money, there are stated income/stated asset programs for those who may have the $$$ but they cannot prove it and who lack the ability to substantiate enough assets. For other problems still, there are no ratio and no doc programs. However, for stated income/stated asset and no ratio/no doc programs, you really have to have good credit because the lending criteria for them is your credit history. (Janet could not qualify no ratio or no doc in a million years with her current credit profile.) But even in doing that, they still have the income to make the payments. Janet does not have the income and going stated will not help with her in the absence of money to pay. Besides, she would never with her credit be approved for stated income anyway.

There are sources where lenders check to verify that the income stated falls within the standard range of income for a given profession. (I happen to be privy to one of the common sources for this and have verified her income based on this model.) Her profession has a low income curve to begin with and even if you take the upper 90th percentile and add 10% to state it, we are looking at a $30,322 stated income. She also has commute issues with her kids and requires a 3 bedroom condo, town home, or whatever. The most we could expect to qualify her for stated (even if she had the credit to qualify and did not have other credit payments) is $148,000.{1} But she has a $259 car payment, a $79 XXXXXXX payment, a $33 YYYYYY payment, a $26 ZZZZZZZZZZ payment, and a $20 VVVVVVV payment. To pay off all but the car payment accounts would enable us to add $158 a month to her housing payment allowance but that puts her actual payment capabilities at around $1200 a month roughly without having to dip into savings as she is doing now. But she does not have the $$$ to pay those other things off anyway so we are back to square one.

The bottom line is, she cannot make the payments and her credit is not good enough for stated without having it repaired. I will refer her again to credit repair specialist Susan Smith who may be able to help in this area but at a minimum it will cost her $500 and possibly as much as $800 to go through Susan's program.

I referred her to Cheryl Miller's lease purchase/credit repair program also and apparently she is not going to go that route which would mean we would work with her on the purchase in a year or two after investors bought a house to finance to her and where she could get her credit fixed, possibly find a cosigner for the future purchase, etc. The cost of that is about the same as going the rental route and I was sure she would have taken it but she has chosen not to for some reason.

We cannot force the client to do something they ultimately do not want to do Alexa and I will request of both Cheryl and Susan to send Janet something on occasion to stay in touch so that perhaps down the line one of them (and by extension you and I since they will market us) can do something for her. I am also going to talk with another realtor I know about some of the investors he knows as that may be a way to do this as well. (And if that works out, you and I could perhaps get referral fees for that.) But beyond the latter possibility, this deal is dead and cannot be revived in the absence of (i) a better credit profile for the borrower, (ii) a job where the borrower makes more $$$ than she currently does, (iii) enough money in the bank to cover for reserves since she has no retirement IRA or 401k we could utilize.

There is also besides those problems the absence of (iv) a mysterious cosigner who agrees to take on the burden of the mortgage obligation with her, or (v) an investor who agrees to buy a property and lease it to her on terms she can meet with the option to buy at some point later on while she rebuilds her credit. The only possibility left at the moment is option 5 and I will see what I can do on that. But beyond that -and I would not put much hope in the latter one in light of everything we have to work with concerning Janet's situation- this deal is for the time being a dead one.


Note:

{1} In the areas this lady is willing to buy in, $148,000 will not buy her a 3 bedroom condo -heck getting anything more than a 1 bedroom with a roof in this market is no easy task in the areas she is interested in.