The Veridian Blog

Ron is looking to purchase a house from a seller who bought the property only a month ago through a foreclosure sale.  The foreclosure price was $250,000 and the seller is now listing the property for sale at $575,000.  What problems may Ron face with finding adequate financing?

Wholesale lenders today make every effort to completely disassociate themselves from anything having to do with the subprime world of yesteryear.  One example is a situation like Ron’s where a foreclosure results in an immediate and substantial gain to an opportunistic "flipper".  There’s nothing wrong or illegal with it, in theory, the issue that lenders have to deal with in the secondary market is having to explain such large increases in sales price over such short time frames.  Even if they could, they won’t because on its face, it can’t be explained - it is anything but an arm’s length transaction due to the sheer increase in price.  As a result, lenders have developed “anti-flipping” policies to curb such practices by implementing seasoning requirements lasting from 90 days to 6 months.

Ron thus has to wait it out and hope someone else doesn’t plop down the $575,000 in cash, or find a B-paper lender (a whole other story) if he is really desperate to buy the property.

As far as we know, there is no minimum amount that would constitute a “flip”, but any increase over a period of a month will certainly be scrutinized.  They would expect some improvements to be done to the property to support the increased value.

If you purchase a home with the intent of moving into it as your principal residence after some extensive remodeling, can you still apply for a principal residence loan?

Absolutely not.  Even in the “loose-lending” years, principal residence declarants were required to move into the subject property within 60 to 90 days.  Today, occupancy affidavits and lender audits (yes, they actually check to see if you live there) prevail so that if applicants apply for a principal residence loan there are no two ways about it.  In addition, the borrowers may also have to sign letters of explanation regarding the move, and change in employment, ability to work from home and commute time. 

As an alternative strategy, it may be possible to characterize the subject property as a second home, thereby receiving the same rate sheet benefits as do principal residence subject properties, but the subject property will most likely have to be located in a vacation or resort area. 

If not, then the only other occupancy choice is non-owner occupied (investment) property which yields an interest rate 0.25% to1.00% higher.  That may be the only solution at least until they ultimately decide to actually move into the subject property – at which time they can explore options to refinance their principal residence.  There is no time or seasoning requirement typical of a principal residence occupancy characterization.

Many clients and realtors ask me about dropping their rate after locking in – is this possible?

Traditionally, wholesale lenders officially prohibit dropping a rate after it has been locked.  Otherwise, everyone would lock as soon as possible only to re-lock if the rate subsequently dropped.  There would be no point to rate locking and lenders would find themselves on the short end of the stick. 

However, most lenders currently offer a re-lock and rate drop, or renegotiation for a fee – anywhere from 0.25% to 0.50% of the loan amount.  What this means is that rate drops are possible but only in a scenario where the general level of interest rates drop significantly enough to warrant (broker or borrower) the additional fee.  This situation seldom occurs in an average market environment because the significant drop has to happen in a short period of time – usually 30 days or less.  Also, it almost never makes sense for brokers to switch to another lender because we almost always choose the lender with the best rate to begin with. 

An alternative for borrowers is to let a current rate lock expire and wait 30 days before becoming eligible to re-lock at the then-current market price without an additional fee.  That would be a monumental gamble, however, as anything can happen in those 30 days.  This option is somewhat outdated because lenders soon realized that all their files disappeared when borrowers flocked to other lenders who didn’t impose such restrictions.  Hence, lenders created their own renegotiation policies.  For more detail, (a lot of this is easier to explain by phone) please ring us!

Clients Jimmy and Joanne are looking to purchase a house by putting 20% down.  In order to benefit from the lower, traditional conforming interest rate, Joanne’s father Ed wishes to lend them an additional 20% so that they only have to borrow $417,000.   Ed intends to execute a promissory note and record a proper Deed of Trust in the same escrow transaction.  What problems will Jimmy and Joanne face from the mortgage lender?

Wholesale lenders, for the most part, will not lend in front of a private party mortgage holder.  Jimmy and Joanne are much better off receiving the extra money as a gift.  All Ed would have to produce is a gift letter and possibly document the source of funds.  If Ed isn’t feeling that altruistic however, he may want to opt for a different strategy that offers him more protection.  For the extremely savvy and cunning buyers, they can structure the extra funds as a gift and still execute a promissory note (without recording a Deed of Trust) outside of close of escrow to support reported income and interest deductions for the respective parties.  However, that’s an IRS issue I’ll stay away from right now.

If the buyers can qualify without the parental funds, they may want to alternatively consider qualifying without it first, then executing the Note and Deed of Trust after close of escrow.  That strategy doesn’t take much extra time at all, and more importantly eliminates lender involvement and doesn’t jeopardize the purchase transaction.  All the buyers need to do after they own the house is sign the promissory note and Deed of Trust, and send the DOT with a PCOR to the applicable county with a small fee for recordation.

For more insights on this particular scenario, please email me!

Here are some programs, recently risen from the ashes, that may be suitable to a borrower's unique situation.  We've always been strong advocates of the 10/1 ARM, in particular, versus the 30-year fixed. 

Traditional Conforming Loans ($417,000 or less)

10 year fixed

20 year fixed

High-Balance Conforming Loans (Up to $729,750)

7/1 ARM

10/1 ARM

Email us for more info and for your customized rate quote!

Theodore is in the middle of a purchase escrow when he decides that he wants to put down more money and borrow less.  In regard to the new GFE disclosures, what steps will the broker/lender have to make? 

Under the new 2010 RESPA disclosure rules, in general, fees from the lender or broker cannot change unless there is a “Changed Circumstance” in which case a revised GFE must be provided within three business days after receipt of the information regarding the Changed Circumstance.  Only fees directly impacted by the Changed Circumstance can be added and/or increased and re-disclosed.  This excludes the broker compensation which can never increase.  Once actual fees are eventually determined, there is a maximum 10% tolerance level between actual figures and estimated figures disclosed in the GFE. 

Examples of a Changed Circumstance presently includes:

·         Act of God, war, disaster, or other emergency

·         Inaccurate information provided by borrower

·         Changed information such as loan amount or property value

·         Transactional circumstances – interest rate changes until rate lock, or expiration of GFE

When Theodore reduces his loan amount, it will trigger re-disclosure requirements and possibly additional disclosures depending on who the lender is.  Luckily, he is reducing the loan amount which won’t require another underwriting.  If the opposite were true, then the loan would almost certainly be delayed having to be re-underwritten due to the higher payment.  These are additional rules that brokers and borrowers have to be acutely aware of during the loan process, as the consequences of delay can be very significant.