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Pity the poor millionaire who needs a mortgage in the current lending climate. You won't find politicians creating special programs to alleviate their sufferings. Of course, they don't feel the pain in the same way as the common man, but, in many ways, the financial crisis has wreaked more harm upon the jumbo lending market than others resulting in much stricter underwriting guidelines, lower loan amounts (absolute dollar and as a percentage of the property value), higher credit score requirements, and higher interest rate spreads between non-jumbo and jumbo loan amounts. Combine that with the disappearance of the high net worth borrower's best friend (aka, the stated income loan) and you have a perfect storm of conditions that can frustrate an otherwise opportune time to purchase or refinance jumbo properties.
The good news is that are ways to access current excellent purchase and refinance opportunities that overcome the unique challenges faced by high net worth borrowers. Some are more creative than others (like the Asset Utilization loan), some are downright boring (like more informed, tax savvy underwriting), but, all can be reliable and prudent solutions to an otherwise challenging financing process.
Tax Savvy, Experienced Underwriting Often Eliminates the Need for Stated Income Treatment Stated income loans have become symbolic of nearly all the housing woes over the past three years. Nicknames like "liar's loan" have supplied the necessary sound-bite flair to banish the once popular (and useful) product from the lending universe. The reality, however, is that, (censurous nicknames notwithstanding), this loan has always been more of a lazy or ignorant loan officer's loan than it was a liar's loan. For ethical borrowers and lenders, income was generally stated not because it was impossible to prove, but rather was difficult and tedious to do so for borrowers with complex financial profiles. After years of little or no documentation requirements, many of these borrowers, loan officers and even underwriters have lost the ability of documenting complex income situations. The solution for this problem is fairly straight forward; high net worth borrowers just need a more tax savvy brand of loan officer who thoroughly understands corporate and personal income tax reporting so that an optimized tax return (reflecting low income) does not necessarily need to conflict with favorable underwriting results.
Asset Utilization Loan - Deemed Income from Liquid Assets For the income challenged borrower, some lenders will allow documented liquid assets to create deemed income based upon an asset utilization formula. These formulas vary, but one such program allows income of 4% of discounted asset balances annual income. This income is added to the borrower's other sources of income (including dividend and interest income from the same liquid assets) to determine the borrower's capacity for the proposed loan. Asset discounts are based upon the type of assets involved with 100% of cash, 70% of stock and 60% of retirement assets (if borrower is at least 59 ½ years old) allowed. The chart below illustrates the benefit of this approach for a hypothetical investor with a $5 million portfolio.
Cash, CD's, Money Markets
Retirement (only if borrower > 59 ½)
Less minimum asset requirement
Deemed annual return
Deemed annual income (add to other income, including dividends, interest, etc.)
Trust Loans - Revocable, Irrevocable, Qualified Personal Residence Trusts, etc. Another challenge somewhat unique to high net worth borrowers are loans for properties vested in irrevocable trusts. Just about anyone can finance a property in your basic revocable living trusts, but these trusts are often insufficient vehicles for high net worth borrowers which require more complex trusts including (but not limited to) Qualified Personal Residence Trusts. These trusts are frowned upon by Fannie and Freddie (which will only finance revocable trusts), so, borrowers who need to vest in these sorts of trusts have generally been limited to a handful of higher cost lenders with limited competition. The good news here is that the number of lenders that service these types of trusts has broadened and the processes for underwriting and funding such loans have become more consistent. High net worth borrowers now have wider options for purchase and/or refinance opportunities without giving their CPA's, attorneys and financial advisers a heart attack.
None of these solutions are going to be accessible or relevant to every high net worth borrower, but, for the countless borrowers and their advisers who have not evaluated their lending options over the course of the last year or so, a fresh analysis may yield surprising results.
The opinions expressed in this article are entirely my own and not necessarily shared by Guild Mortgage Company.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.