August 8th, 2014 7:22 AM by Richard T. Cirelli
Alternative Financing Options, 2014:
In the years preceding the great mortgage meltdown of 2008, there was a class of mortgage loans known as “Alt-A”. These were loan programs that allowed for “alternative” documentation or underwriting guidelines for borrowers that didn’t quite fit the box for traditional loans, but they had with “A-Paper” or good credit. They just missed qualifying due to their income, assets, credit or some combination of these factors. When the mortgage collapse occurred, Alt-A loans disappeared just as quickly as subprime loans.
Now, they are back and it feels like 2006 all over again. There are some differences between these new products and their predecessors. But with “A-Paper” or “good” credit, they are available again, albeit with more conservative qualifying criteria than before.
I’ll explore the new breed of Alternative Financing and Alternative Documentation loans here. Keep in mind that lenders don’t all have the same guidelines so I’ll keep the information general.
Stated-Income or Lite –Doc Loans
This was probably the most popular feature among the alternative financing options. As the name implies, the borrower “states” their income. It is not documented via tax returns or other traditional methods. With today’s breed of stated income loans, the borrower must have good credit with FICO scores of at least 700 or 720, depending on the lender. Significant equity is required, usually 30% to 40% of the value of the home depending on the amount borrowed. Today’s stated-income borrower must also have significant cash reserves, the amount depending on the loan amount. Most lenders that offer this product do so only to self-employed borrowers.
Bank Statement Income:
Some lenders will now calculate qualifying income by measuring the amount of deposits that flow from the borrowers business to their personal bank account without requiring income tax returns or other income documentation. The most recent 12 months of statements is typically required but I’ve seen some lenders require just two months. Again, it’s primarily designed for the self-employed.
When using this method, the lender will essentially amortize a percentage of the borrower’s assets over a defined period of time and count it as income. The assets may be savings, liquid investments such as stocks and bonds, or retirement accounts. For example, say a borrower has $1 million in a combination of savings and retirement accounts. A lender may use 70% of these assets amortized over a period of time such as 5 or 10 years. Even though it is not really income, it’s treated as though it is. The guidelines vary greatly among the lenders that offer this type of qualifying income. A period of 3 or 5 years is the minimum period of time that the funds must last if periodically withdrawn or amortized although much longer periods may be required by some lenders and can depend on the borrower’s age.
Similar to Asset Depletion, a borrower that is of retirement age and has significant funds in a Retirement account can set up an automatic monthly withdrawal from their IRA account and treat it as income for qualifying purposes. There does not have to be a long history of taking distributions and most lenders will allow the borrower to set it up during the loan process if it is not already in place. The accounts must have a remaining term of 3 years, 5 years or longer depending on the lenders guidelines.
A common situation is when a homebuyer finds a new house to buy before selling their current home. Many sellers won’t accept an offer contingent on the sale of the buyer’s current home and the buyer doesn’t want to sell his/her home until they know they can buy the new one. If the buyer needs the equity out of his home to buy the new one, the solution might be what is called “Cross-Collateralization”. In this scenario, the lender makes a new mortgage that is secured by both the buyers’ old and new homes. When the old home sells, the loan is partially paid off leaving the buyer owing just the amount that then needed or wanted on their new home.
Sometimes it’s impossible for a borrower to qualify for any type of bank or institutional loan. In these cases we will arrange for private investors to make the loan. Interest rates and costs are much higher as are equity or down payment requirements. But, it opens up new opportunities that would otherwise be unavailable. Private money loans can be particularly beneficial for short term money up to 2 or 3 years. They also offer the advantages of a quick close, less documentation, and the terms can be tailored to suit the borrower’s needs.
Foreign buyers represent a rapidly growing segment of homebuyers, particularly on the west coast. Traditional lending is only available only to U.S. Citizens or Resident Aliens with a Green Card. There are now alternative programs that accommodate borrowers that are residents of foreign countries. The terms and requirements for these loans vary greatly.
It’s best to deal with a mortgage broker that has access to multiple sources of mortgage money. The big banks have not entered the Alternative Financing arena as yet and may never do so. And, since guidelines vary dramatically among the various lenders that offer these products, a mortgage broker has the advantage of shopping among multiple resources.
It’s exciting to see so many Jumbo products returning to the mortgage market, including even a “Stated Income” loan.