Having Your OREO and Depleting It Too

Asset-backed or asset qualifying mortgages are not endangered species around here. Not a week goes by where we don’t field an inquiry from a home buyer or homeowner seeking a mortgage but devoid of the typical income qualifying requirements; paystubs, W-2 forms and tax returns that show what they really earn in any year. So using assets to qualify for a mortgage has become a viable alternative for those who have strong credit and who have demonstrated the ability to save and invest. These individuals can often parlay their (liquid) net worth into qualifying power, and maybe the best part is that they do not need to sell or otherwise touch those assets.  Asset depletion, asset utilization, asset amortization or asset-backed loans — whatever you want to call them — are, indisputably, no longer mortgages relegated to the high-rate outer fringe of the lending industry.

But up until this time, one of the major hindrances to qualifying for an asset-backed loan is that we have not permitted borrowers to use the equity in other real estate owned (OREO) as a way to qualify. Yes, we count cash-equivalents, stocks, bonds, mutual and exchange-traded funds and even retirement accounts in some cases. But equity in other real estate? It was a non-starter. You could literally have millions of dollars worth of property in your portfolio but we would not consider it, except on the liability side of the equation. That’s changed with our new asset qualifying program and here are the key things to know.

Asset Utilization

Utilization of financial assets will be considered as borrower income to help qualify for their monthly payments. The assets themselves do not need to be liquidated, moved, pledged or otherwise. We can also use asset depletion to supplement other sources of income, including employment-based income, Social Security and the like. The key thing to know with this program is that after the down payment and closing costs have been made (in the case of a purchase) the borrower must have $450,000 in ‘net’ assets, and this is further governed by the requirement to have the lesser of $1MM or 1.25 times the loan amount in ‘qualified assets.’ Let’s examine each category and then give an example of a purchase scenario.

Net Assets

On our asset-backed mortgage here, your “net assets” are those that remain in your accounts after you’ve closed the transaction. Further, whatever that number will be, we’ll apply a qualifying percentage to those balances. Non-retirement investments are counted at 85% of their total value, retirement accounts at 80% and other real estate owned (OREO) at 75% of its equity position, determined by an exterior appraisal or broker price opinion (BPO). Remember, post-close, we need to have no less than $450K remaining via all sources.

Qualifying Assets

In order to drive asset-based income, we use our net asset total above, but must assure that it first meets or exceeds 125% of the loan amount or $1MM, total, whichever is less. We will then take the net asset total and apply a utilization draw schedule of 120 months. The resulting figure can be used to create or supplement qualifying income.

Digging In

Let’s use the test case below to demonstrate the power of this program:

  • Purchase price: $500,000
  • Down payment: $100,000
  • Loan amount: $400,000
  • Estimated closing costs: $10,000

Qualifying assets:

  • $25,000 in checking/savings (utilized at 100% for a total of $25,000)
  • $100,000 in a money market fund (utilized at 100% for a total of $100,000)
  • $120,000 in stocks/bonds/mutual funds (utilized at 85% for a total of $102,000)
  • $200,000 in retirement accounts (utilized at 80% for a total of $160,000)
  • $600,000 in equity in OREO (utilized at 75% for a total of $450,000)

Net assets: $837,000 (qualifying assets) – $110,000 (transaction requirements) = $727,000

In this case, $727K is greater than 1.25 times the loan amount ($500,000) and greater than $450K in post close, so we can deplete the amount. If we divide $727K by 120 months, we derive $6058 in monthly qualifying income. This can be added to any other income the borrower documents, or it can be used on its own, if sufficient to make debt-to-income ratio requirements.

Icing on the Cake

Asset-utilization mortgages have been in existence for a bit of time now and are gaining popularity each month. But our use of OREO is unique and a force multiplier for these types of qualifications. If you own real estate that has a lot of equity in it, and you need an alternative qualification method, perhaps because you’re self-employed or have variable income, give us a call and let’s review your profile in this new light. The results might be sweet.

Oh, oh, Oreo, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Finding Harmony in Unison

Ever since the woebegone days of Greenpoint Mortgage’s 400+ page rate sheet (and those who remember are laughing right now…) we in the mortgage lending industry have become accustomed to recognizing that not every borrower and not every scenario will fit exactly in the credit box. That’s just been a reality of the post-Dodd-Frank era. Lending solutions rarely “check all the boxes” and I hear myself reminding clients, not infrequently, to “not let the perfect be the enemy of the good.”

So you can imagine that when we start talking about jumbo loans and lower down payments AND add in the element of a credit blemish or two, things can get really imperfect. How can we achieve just that perfect level of harmony for the buyer? How can we create a mortgage masterpiece for the 10% down payment borrower who may not have a 720+ FICO score? The answer is the Unison program, which was formerly known as FirstREX.

Let’s cover some basics first. Unison is not a loan. It is down payment “enhancement” that typically matches a buyer’s investment. So in the classic example, the borrower will get an 80% mortgage from us, they will bring in a 10% down payment, and Unison will then match their 10% down payment for a total of 20% down. Unison’s investment comes with no monthly payments and does not need to be repaid for 30 years. When you end the Unison agreement, by purchase, refinance or buyout, you agree to pay them their initial investment plus a percentage of the value change. It’s a shift of the paradigm — instead of servicing debt each month, you are partnering with them long-term and with the understanding that sharing a fraction of tomorrow’s value is much better than not owning at all today. And to serve as a stark reminder, “today” means coming up with the full 20% down payment and bringing the credit profile to the stellar levels it would otherwise take to get a competitive loan alternative.

Now of course, the push back on the Unison program has always been, “No way! I don’t want someone else sharing in MY appreciation.” OK, fine. I hear you. But first, let’s accept that YOU don’t have any chance of appreciation if you can’t buy, and YOU are not in a position to buy without Unison’s help. And secondly, recall that I mentioned that Unison was formerly known as REX. I used to drop this line on potential REX candidates: “I understand you do not want FirstREX partnering in your purchase and potentially getting a share of your appreciation, but what if we called FirstREX ‘Uncle Rex’ instead? How would you feel then?” I didn’t usually need to wait for the answer. I could see the expressions on their faces change. It was evident that if a family member could cut them the very same bargain, most would accept. So why the resistance when we supplant a company that has the capital and wherewithal and has diligently structured such a mutually beneficial agreement? Again, it may take a more visionary mind to come to peace with how this program works. True, it’s not DaVinci’s mortgage. It’s very much the product of a new approach to an increasingly high barrier of entry to home ownership in many desirable areas.

So if you find yourself looking to buy a home with a jumbo mortgage and less than 20% down. If you find that your FICO score is 680, 700 or under 720. If you find that desirable homes in your area continue to fall just out of the reach of your buying power, it may be time to find the harmony in Unison. Call me if I can help today.

Cracking the code, 

 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283