5 ways to qualify without using a bank!
If you took 100 willing propects who want to buy a home, and know they can af ford the payment, less than 50 of those prospects will qualify for a mortgage loan at that moment! Does that mean the other 50+ candidates don’t deserve to own a home? Absolutely not! There is no credit problem that cannot be fixed with time and strategy. There is no income problem that cannot be fixed with proper education. There is no one who can’t get access to money in some creative way if the down payment is the only requirement. While some banker looks at your loan application to see if you “fit in the box”, I take a different stance. Everyone who really wants to own a home will truly appreciate a professional assement of where they are now, what they need to do, and how long it will take to get there. In the mean time – why not buy a home using seller financing? Keep reading further and we will discuss the various options at your disposal and how you can leverage your needs and win-win situation for both you and the seller.
So what is the Credit Jungle?
It’s kind of like the Harley Davidson T-shirt “If I have to explain, you wouldn’t understand“. There only 2 reasons why someone would ask. Number one – you’ve never tried to buy a home. Number 2, if you have, your parents lent you the money. If you are somewhere in between, you already know what the credit jungle is. There is no single financial event in your life that will require more disclosure of stuff you thought “private” than the process of buying a home. Not only are there a myriad of options, but the process itself, if not understood and explained properly, can literally be a jungle of confusion and entanglement.
Who is George of the Credit Jungle?
I started my mortgage career in 1989, and ironically, some of the lessons learned way back then have proven to be the most valuable over time. We met with people face-to-face. It took a day or two to get the credit reports back, so we presumed every client had good credit until we learned otherwise. We took T I M E to analyze their income and asset documents without ever pre-judging their credit standing. The credit reports were faxed, or hand delivered and we took great care to hear the borrower’s story and find a way to make the transaction work. You see, it would be the mid 90’s before credit scoring and FICO scores had anything to do with qualifying for a loan. Credit education has become even more important these days, that’s why so many of the principles lenders HAD to learn back then laid a great foundation for my success today.
Over the past 4 decades I have closed thousands of mortgage loans – be it FHA, VA, USDA, Utah Housing Corporation, Conventional (both Fannie Mae and Freddie Mac), Conforming High Balance, Jumbo/Non QM, Reverse Mortgage, Refinances, Special Portfolio Lending, Bridge Loans, Private Investor loans or even Seller Financing. Have you been told you have an unusual, or even an impossible situation? Chances are I’ve found a way to get someone just like you approved!
Want to know the difference between a good loan officer and a great one?
It is one simple task – learning how to ask the right questions. There are a few key questions most bank and credit union loan officers would never think to ask. Most loan officers simply put the data into their computers, run it through an automated underwriting system, or AUS called Desktop Underwriter or Loan Prospector. If the results come back positive, they move forward, if they come back negative, the process grinds to a halt. A little over a decade ago I worked with a prominent national builder. They had their own “in-house” lender who gathered the clients’ data and was really good at filling in the computer forms. When the file failed in the automated system they used me, along with a few other lenders, as “back up” to get more homes financed and sold. The builder figured most of these people would get sub-prime, or alt-A loans with higher rates and closing costs, but they really didn’t care what terms the money came in at. When those people fell into the lap of the other lenders, that was the result. My clients, however, with only a couple of exceptions, were able to qualify for FHA, VA or conventional loans! What was the difference?
Asking the Right Questions
Again, this goes back to asking more questions and getting the client’s story. It is amazing to me how many veterans have never used their VA eligibility simply because the loan officer never asks. It is amazing to me how many people are able to get a small gift, or another source of money, for a slightly larger down payment. That little bit extra can make the loan work. It is amazing to me how many people’s credit scores can be boosted 100 points in 100 days. It is amazing to me how many people, when asked, can find a family member who is willing to co-sign on a loan. Most people would look at co-signing for a mortgage as a 30-year yoke of bondage that will cripple the co-signer. Not true. After just 12 months, the co-signer won’t be hampered in the least bit if the primary borrower can produce 12 months of canceled checks showing those payments have been made on time. There are many self-employed borrowers who make plenty of money to afford a house payment, but the tax returns don’t show the numbers the way the computer system likes to see it.
This same philosophy applies when determining if a borrower needs a little more time, or some coaching with the filing of tax returns, or with the credit report. During the mortgage apocalypse that started in 2008 and lasted nearly 5 years, there were millions of people who lost their homes to short sale, or foreclosure. There are very specific time frames that need to be met for each type of loan program when this event is on the credit report. In the case of a short sale, the peg in the sand is determined by the day the HUD1 settlement statement was signed. In the case of a foreclosure, it gets a little more tricky. Even the most experienced loan officers will get this one wrong. The date for the peg in the sand is determined by the recording date of the Trustee’s Deed. This document gets recorded only when the foreclosing bank takes the property to sale and successfully transfers the property to a new owner. People who thought their home went to foreclosure simply because they had vacated the property were astounded in many cases to find the bank was still sitting on the vacant home for one or two or even three years in some cases. For borrowers in this situation, the clock had not yet begun to run. How frustrating! If the lender wasn’t savvy enough to request a copy of the Trustee’s Deed, the credit report by itself doesn’t normally provide enough information for a definitive answer.
Bankruptcy brings in an entirely new set of circumstances.
I work with several prominent bankruptcy attorneys in Utah and have been a referral source for sending people to them, but more so in receiving referrals from them. There are some distinct differences in how FHA and VA treat chapter 13 versus chapter 7. During the mortgage melt down a lot of people filed a chapter 7 bankruptcy and were advised by their attorney to surrender, or include the underwater home into their bankruptcy. That works just fine with respect to a deficiency judgment once the home sells, but it does not accelerate the processing of the Trustee’s Deed. In almost every case, both the bankruptcy attorney and the borrower thought their Chapter 7 discharge date would be the peg in the sand, but not so. I had met with several people who’s bankruptcy had been discharged 2 or 3 years ago, yet the property had sat vacant for many months, or even years after the bankruptcy case was closed. What a disappointment to find that your nightmare was not even close to being over. Having done over 1,000 loans for people with a prior bankruptcy (or were currently in a Chapter 13 bankruptcy) I always knew to dig deeper on these cases. How many people not so fortunate were deluded into thinking that all was well until an underwriter caught the details a month or so after the file had been in process. It all goes back to asking the right questions, and having the experience and knowledge to make the correct call early in the game, not a few days before everyone expected to close.
So how do I do conduct my business these days?
First, I love the opportunity to meet with my clients personally. Yes, I have this website, where someone can submit their own information. Yes, I use text and email messages to communicate, but too many times I find that details get over looked and the personal connection never happens. Details have a big factor in how quickly a loan closes, or whether it closes at all. Secondly, I take painstaking notes and details when reviewing a client’s credit report and income documents. Most people have never seen a Residential Mortgage Credit Report. These are not available on any “free” credit scoring or credit reporting website. These reports consolidate all the data from all 3 major credit bureaus. They use a FICO Mortgage score that is typically much lower than Credit Karma, Vantage Score, Score Plus, or a variety of other scoring systems that were developed to mimic or to compete with FICO. Even within FICO, there are different brands of scores since car dealers and insurance companies use a different FICO system to evaluate their customer’s potential to default. These RMCR reports display what is known as Repository Reason Codes. These codes are the key to understanding WHY someone’s score is where it is, and what actions need to be taken to boost the credit score. My clients leave my office with a written game plan on how to boost their score, and if necessary, the 3rd party services that will give them the help I am not licensed to provide. In some cases this may be a referral to a credit restoration company. In some cases to a debt settlement company, and in extreme cases, to a competent attorney with a dedicated practice to just bankruptcy law.
There’s good news!
One of the most exciting things going on in the credit jungle right now is the return of manual underwriting. This option allows credit-blighted borrowers an opportunity to get into a home with A-paper interest rates. Until recently, a borrower HAD to pass the automated system and FHA’s Total Score Card system to qualify for a mortgage loan. Prior to the mortgage melt down there was always that manual option if the computer approval system failed. During the 5 year absence of manual underwriting it is estimated that nearly 4 million potential home buyers could have qualified for financing! This is an art form, and very few new loan officers even know this option exists, much less how to use it. It is really the return to good old fashioned, common-sense underwriting. To be clear, manual underwriting is not stated income, or stated asset lending. It is for people who have lower credit scores or no credit scores. These are people with verifiable income and a legitimate down payment. These are people who can afford a house payment, but the FICO scoring system and the Automated Underwriting Systems have failed them. The real loser is the housing market and the loss of so many potentially good home buyers. The manual underwriting option is back, and it is my specialty and my passion.
What about those who don’t qualify?
Let’s talk for a minute about the times when someone can’t qualify right now. Does that mean they can’t purchase a home? Not at all. In fact, at least half of all willing buyers won’t fit into the box for a loan approval right now, yet many of them are paying rent that would be more than the house payment and they have a decent down payment to work with. What can these folks do while they are preparing to qualify? SELLER FINANCE. Owner financing comes in a lot of different forms which we will discuss briefly, but in every case, the seller is the bank and the terms are much more flexible. This is much more true with a larger down payment – this is the seller’s security in these transactions.
I have taught seller finance classes for the past 8 years as a certified Continuing Education instructor for the State of Utah’s Real Estate Division. I have also taught these concepts in several other states. In general terms, the lowest form of down payment with a seller is a lease option, or rent to own. 3% to 5% down is typical and there is still a landlord/tenant relationship between the owner and the buyer. The buyer’s option payment will typically apply towards the down payment and/or closing costs at the time of execution. The buyer has the guarantee of a locked in sales price, even if the property appreciates more than expected. The seller’s cure for default on the contract is an eviction.
The next form is an all-inclusive trust deed, or wrap-around mortgage. In this transaction the buyer would ideally have 20% or more to put down. The seller transfers title, so the only recourse to cure a default is a lengthy and costly foreclosure proceeding. This is why a seller should demand the larger down payment if they are transferring title. The seller may have an underlying mortgage obligation, so the seller can actually leverage their equity by carrying a contract at a higher interest rate than they owe on the underlying mortgage. In addition to the rate of return on equity, there may be some tax advantages to this strategy also. Lease option and all-inclusive trust deeds are by far the most common, but each one is at the extreme end of the spectrum. There is a third option that combines the best of both while still giving protection to each party’s interests. This will be the next item of discussion.
Land Contract, Contract for Deed, Agreement for Sale, Uniform Real Estate Contract, Bond for Deed, Owner by Contract, etc. are all terms that most Realtors recognize all over the country. For centuries, this was how people bought homes when bank financing wasn’t available and the buyer couldn’t pay cash. In this transaction the buyer will put down 5% to 15% and then make payments on a contract for a time. Hence the term Contract for Deed. There is no landlord tenant relationship here, and the transaction becomes a taxable event for both buyer and seller. Sales can be entered as a bona-fide closing on the Realtor Multiple Listing Service (MLS). The buyer holds an equitable interest in the property, but the seller is still the owner of record. There is a lot of flexibility with the terms of these contracts and the cure for default is somewhere between the first 2 options. Default on the terms first requires a cancellation of contract, which if followed by an eviction. The difference is that the buyer has more time to cure the problem, and the seller has less time and expenses to get the house back if the problem cannot be fixed. It is a 60 to 90 day process with minimal legal fees.
So where do you start if seller financing is your immediate option?
Well, you start where you plan to finish. That means making an application for a mortgage loan. Yes, we know you don’t qualify right now, but every seller has 3 questions that must be answered before the buyer has any leverage to negotiate. #1 – what is the problem, or why can’t the buyer qualify right now? #2 – what is the game plan to fix it? #3 – how long will that take? So here is the question. Who is best qualified to provide these answers? The seller’s don’t know what questions to ask, and the real estate agents can’t afford to give bad advice in an area outside of their expertise. Again, this is the role of the mortgage lender. In my experience working with hundreds of buyers in this situation, I have found the key to success is full transparency. If the buyer is willing to lay all their cards on the table, the seller will feel more comfortable. If the lender has permission to disclose the financial circumstances to the seller and share the game plan, the buyer now has me as an advocate and the ability to lay out reasonable terms for them to start enjoying homeownership immediately.
I will guide you through the credit jungle.
You might ask – why would a lender spend time, money and energy to help someone who might not qualify for 2 more years? Well – most of them won’t. Most lenders are short-term, quick-buck thinkers who don’t have the long term perspective I have acquired over the decades. There is no incident in any underwriting guideline that will disqualify a borrower “forever”. There are simply time frames that need to be understood and explained. Most people when given the goal of financing a home will take the necessary steps to make their own dreams come true. It has been my privilege and my passion to guide people through the credit jungle and get them home.
 Laurie Goodman, Jun Zhu, and Taz George. April 2nd 2015 the Urban Institute, Washington DC