There are always exotic mortgages for tough-to-qualify borrowers when demand dwindles among the A-paper crowd.
By Jeff Lazerson | email@example.com | MortgageGrader.com | February 13, 2022
Conventional mortgage refinancing volume has fallen off a cliff as rates are more than a full point higher than the all-time Freddie Mac low of 2.65% set back in January 2021.
Conventional loans are also plenty slow, stemming from a dearth of homes for sale.
But the mortgage machine must be fed. And thus, there are always exotic mortgages for those tough-to-qualify borrowers when demand dwindles among the A-paper crowd.
Shall we first go down mortgage meltdown memory lane? Confounding and complicated in the Great Recession was a cornucopia of thin or even zero down-payment financial instruments with names like “No Doc mortgage loans” (no income documentation), NINA (no income, no asset) and of course NINJA (no income, no job, no assets).
Fast forward to 2022. Brand new from the exotic mortgage manufacturing world comes what I’m calling NADA JOB, NADA CREDIT (no job and no credit report) for investment property financing.
If you are a real estate mogul in witness protection, this loan is calling your name.
Seriously, it doesn’t matter whether your credit is shot full of foreclosures and previous bankruptcies. Or your middle FICO credit score is a big, bad 500. Or even if you don’t have a Social Security number to your name.
A title search on you will be done. If you are in bankruptcy, for example, then no loan for you. Or, if you have a publicly recorded court judgment outstanding in your name, then the title insurance company will not insure the property title. No title insurance, no loan. Those are about the only disqualifiers.
Job? What job? Nobody needs a job or any kind of income documentation to qualify for this special financing. Having a job is so pre-COVID thinking, right? Regardless, if you have a job, there is no place to put it on this mortgage application. Nobody cares.
Here are the basics: Maximum loan amount is $5 million for any one-to-four-unit investment property, even mixed-use. Owner-occupied is not allowed!
You must put at least 30% down on a purchase or must have 30% remaining equity after the completion of the rate and term refinance or cash-out refinance.
The interest rate is 4.5% amortized on a 30-year fixed rate. Not bad. The borrower will have a balloon payment due in five years and a first-year prepayment penalty of 2% of the loan balance should you decide to pay the loan off in less than one year.
You do have to frontload four years or 48 months of principal and mortgage payments into a bank account accessible for the mortgage servicer each month when your mortgage payment is due. You can use cash-out (from a cash-out refinance) to frontload the required mortgage payments.
Here’s an example: Investment property has a $2 million sales price. The borrower must put 30% down or $600,000, leaving a loan balance of $1.4 million. The monthly principal and interest payment at 4.5% on a 30-year fixed is $7,094. Multiply $7,094 times 48 months (for those payment reserves) for an additional $340,512. Effectively the borrower is coming up with 47% of the sales price to make this happen. But you don’t have a house payment for four years either.
Unlike standard conventional financing, there is no requirement to prove where the down payment funds or cash reserves came from. Can you say, straw buyer?
Upfront, the borrower will pay 3 points or less to acquire this financing instrument. Each point is 1% of the loan amount or $14,000 in the above example.
Another hot exotic mortgage is a new, 3-month bank statement loan, perhaps especially good for self-employed borrowers (self-employed two years or more) struggling through COVID-19 business stop-start-stop stuff over the past couple of years.
The lender averages your business bank statement deposits over the most recent three months, excluding an expense factor. The remaining average of the deposits is counted as the income. For example, you can go 75% loan-to-value with a 700 middle FICO score up to a $3 million loan amount. This is for owner-occupied, primary residence only. This 30-year fixed rate is somewhere over 5% with perhaps 1 to 2 origination points.
Do the current flavors of exotic mortgages require enough skin in the game to avoid a repeat of the Great Recession exotic mortgage meltdown? I sure hope so.
Freddie Mac rate news: The 30-year fixed-rate averaged 3.69%, 14 (ferocious) basis points higher than last week. The 15-year fixed-rate averaged 2.93%, up 16 basis points from last week.
The Mortgage Bankers Association reported an 8.1% decrease in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was a staggering $340 less than this week’s payment of $2,975.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 3.375%, a 15-year conventional at 3.125%, a 30-year conventional at 3.75%, a 15-year conventional high balance ($647,201 to $970,800) at 3.125%, a 30-year high balance conventional at 4.125% and a jumbo 30-year purchase, fixed at 3.25%.
Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye catcher loan of the week: A 30-year adjustable jumbo mortgage, locked for the first 10-years at 2.875% with 1 point.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org.
Jeff Lazerson - Mortgage Columnist since 2011