Creative Financing Can Save the Day

Creative Financing Can Save the Day

     Creative financing is a term that's meant many things over the years.  In the subprime mortgage days, everything seemed to be "creative financing", however it wasn't really all that creative - it was more a matter of hiding pertinent information, or subjectively including data when submitting a file to an underwriter.  Client doesn't make enough money to qualify on their own?  Simply lie, and say they make more than they do.  Ethics not letting you do that?  Simply resort to a NINA program, where no one's going to ask any questions about income, then you don't have to lie.  I never found that kind of financing "creative", but more of a shady way to do business that ultimately led to the mortgage meltdown.  

     Today, "Creative financing" plays a much different role in the mortgage industry, and is a much more above-board way of doing things - in today's world, creative financing involves extensive knowledge of guidelines, overlays, niches, and laws.  What hasn't changed, though, is that creative financing plays a huge role in getting things done, and your lenders ability to get creative could be the difference between a loan funding or being declined.  Here are some "creative" ways of solving problems by thinking outside the box.

Transferring Debts

     Debt/income ratio guidelines are one of the major reasons loan applications get declined.  America runs on dunkin debt, and it shows on many of the mortgage applications I see - car payments sucking up more than 10% of someone's gross monthly income, credit cards on top of student loans on top of time shares.  A lot of people are living above their means.  I'm not judging, as it seems to be the American way.   That said, mortgage guidelines do judge, and if a debt load is too high, it can be tough to get a loan.  One way to get creative is to transfer debts to a spouse or someone else that isn't on the mortgage application - whether this means turning a jointly held account into an individual account, or having a spouse do a consolidation loan, there are sometimes ways to transfer debt from a primary wage earner to either a secondary wage earner (non-applicant) or perhaps a self-employed spouse that doesn't show much income in traditional ways.  In these cases, a primary applicant's debt/income profile can look drastically better simply by shifting around some debt.  

     I do not advise people living above their means do this as a way to take on even more debt, but there are definitely instances where someone makes more money than they show, or has both a high debt/income ratio and high level of disposable income where this strategy can be the difference between an approval and missing out on a loan.

Refinancing Installment Debts

     Recently, I've seen several instances where an applicant cannot qualify because their debt to income ratio is barely higher than guidelines allow for.  Twice now, all it took was refinancing an auto loan to get debt/income levels to an acceptable level.  In one case, a borrower refinanced their car loan to extend the term and include some high interest rate credit card debt, and it lowered their debt/income ratio enough to qualify for a home loan.   In the other instance, the borrower added a year to their car loan at a lower rate, and voila!  They were able to get a new home loan.  I don't ever recommend adding years of debt to anyone if it can be avoided - but if the result of an extra year's car payments is the house of your dreams, it's worth considering.  This same strategy goes with consolidating student loans.

Adding a Coborrower

     "Is there anyone that could potentially go on the loan with you to help?".  This question can save a floundering mortgage application - often times a parent, grandparent, or in the case of a recent borrower of mine, a niece, can come in & save the day.  The main reason for coborrowers is to help with debt/income ratios, so adding another applicant with a good income and low debts can greatly approve an application, often times turning a "no way" into an "APPROVED!".

     Both conventional & government loans allow for non-occupant coborrowers, so even if the coborrower won't be living in the new home, they can still boost the primary borrower's application strength.

Excluding Cosigned Debts

     If a borrower has cosigned a note for someone else, and can prove that the other person is making all of the payments, sometimes that debt can be excluded from the applicants debt/income ratio.  Documentation requirements can be pretty burdensome, often requiring 12 months cancelled checks or bank statements from the person paying the bill, along with a letter of explanation and clean payment history on the account in question.

     Being creative in this way can really save a deal when someone has cosigned for a family member's auto loan or student loan - freeing up several hundred dollars a month from their debt/income ratio can be a huge benefit to a mortgage application.

Using 2nd Mortgages Effectively

     A 2nd mortgage is a great, creative way to accomplish many different goals when it comes to financing.  Sometimes a 2nd mortgage can allow a borrower to get a lower rate on a first mortgage (especially when refinancing and a 2nd mortgage changes the primary mortgage from a "cash out" loan to a "rate/term" loan.  A 2nd mortgage is also a great way to help borrowers looking to buy a home with a loan that exceeds local loan limits.  In non high-cost areas, borrowers can use a 2nd mortgage to exceed a $417,000 loan limit (the conventional loan maximum in most areas), and buy a home without running into Jumbo guidelines (which often require higher down payments, and sometimes have more restrictive debt/income caps).  For example, in a non high-cost area, a buyer could purchase a $850,000 home with just 10% down by using a conventional first mortgage to $417,000 and using a 2nd mortgage of $350,000.

     While conventional loans and FHA loans have lower caps on "Cash out" refinances when it comes to how much home equity someone can use to refinance, a 2nd mortgage can allow someone to "cash out" up to 90% of their home value - - this additional cash out can be used for debt consolidation that could be the difference between a borrower qualifying, or being denied a loan.

      There are just some of the ways creative financing can be used to save the day.  Knowing guidelines inside & out, and how to help every individual and their unique situation navigate the mortgage process can separate a great loan officer from an average one, and can turn a "no" into a "yes" when it comes to a mortgage application.

Can your loan officer get creative when the deal needs to be saved?