Mountain Mortgage Guy: Alternative mortgage financing is returning, but it’s not for everyone (column)
May 23, 2018
Back until about 2007 or so, most anybody could qualify for a mortgage loan. You did have to be age 21, have a bank account and be able to fog a mirror and sit upright at the closing table to sign your documents, but those were the main requirements for those who wished to become homeowners, slumlords or land barons.
For many borrowers, there were perfectly legitimate stated income programs. Some borrowers have very complex income streams and some have vast numbers of tax loopholes they can take advantage of. The legitimate stated income programs that functioned just fine for years had stringent credit and asset requirements and required a large down payment.
But as time went on, the NINJA loan model became commonplace, and borrowers with no income, no job and no assets suddenly could borrow money like a Rockefeller. That triggered millions of buyers entering the marketplace who should never have become homeowners, and millions who were seasoned homeowners to take on more debt than they should have. That fueled housing demand, which led to skyrocketing prices, which led to the housing market implosion in 2007.
A World of Changes
“There are a myriad of calculations and parameters that dictate how and if a particular scenario will work, and it’s not a slam-dunk easy thing to obtain such an alternative loan, but for some it will fit nicely into their plans.”
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In 2008, the world changed, with Draconian requirements being imposed on borrower, effectively trapping many in their homes because they could no longer qualify to buy or refinance, even if they would take on a lower payment than the one they had successfully been making for years. Borrowers had to document every penny of income needed to qualify, and near-perfect credit became the minimum standard.
Now, 10 years later, the credit markets have reopened to allow borrowers who can't always document enough income but have good credit and a down payment to get mortgages again. In the past few months, I have seen numerous lenders start to offer mortgages where the income is derived from averaging a borrower's bank statement deposits over a six- to 12-month period.
This means that if you are self-employed but have a ton of write-offs and show perhaps $7,500 per month income on your taxes but show $10,000 per month in deposits, then you might qualify based on a $10,000 per month income.
Myriad of Calculations
In some cases, if that doesn't cut it and the borrower has substantial liquid assets, then the lender will impute a hypothetical draw down of assets to get the income over the top. So if you needed $11,000 per month to qualify for a mortgage payment but only showed $10,000 per month coming through your checking but you had another $50,000 in a broker account, then the lender might consider that you could draw down your nest egg $1,000 per month and call it good.
There are a myriad of calculations and parameters that dictate how and if a particular scenario will work, and it's not a slam-dunk easy thing to obtain such an alternative loan, but for some it will fit nicely into their plans.
The rates will be higher than a conventional mortgage, with many scenarios working out to rates in the 6 percent to 7 percent range, versus the 4 percent range for a conventional loan. But keep in mind for most of the last 30 years, rates were in the 7 percent to 8 percent range and life went on its way.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.