Mortgage qualifying rules get creative

Mind-boggling lender guidelines based on borrower’s claimed ability to repay the loan, not income.

What if you don’t have quite enough income to support your mortgage application loan request? But you own other properties with equity. No problem!

One investor now allows mortgage loan originators to calculate the equity from your other properties and divide the equity by 84 months and call it income.

For example, you have $300,000 of equity between your second home and a rental. Divide $300,000 by 84 months equals $3,571 and call it additional income.

Wow! Recognized income without paying any taxes. Take that David Copperfield!

Or, how about a streamline refinance program on steroids where you leave the job and income sections of the mortgage application blank.

You have to prove you have made your mortgage payment on-time for the last 18 months. You have at least 20% equity. Your loan amount does not exceed $2 million. You have a FICO middle credit score of 700 or better. You are good to go!

How about the old fog-the-mirror loan?

Put 30% down. Have a FICO middle credit score of 700 or better. No employment stated or verified on the loan application. You can borrower up to $3 million on your purchase or no-cash-out refinance.

What gives?

The Consumer Financial Protection Bureau (a.k.a., the mortgage police) asserts the ability-to-repay rule is the reasonable and good faith determination most mortgage lenders are required to make on your owner-occupied property.

So, how can a lender lay claim the rental and second home equity as income of $3,571 in the first example?

Well, if the property owner was in a pickle, he or she would need to quickly convert the equity to cash by selling those properties to generate the $300,000. The borrower would have to earn more than 14% once his equity becomes liquid to generate the $3,571 of income.

Fat chance of that.

Or, perhaps it buys the borrower more time to come up with a solution to his money woes. Creative. Aggressive. Hard to fathom? Absolutely.

In the streamline refinance example, the borrower, for whatever reason, cannot document enough income to get away from his high mortgage rate on his conventional loan. He would most certainly be motivated to knock his interest rate down.

The streamline rate starts at 5.25%, Chances are the borrower has an ongoing higher rate or maybe an existing hard money loan at say 9% with a balloon payment coming. Why not let him better his situation?

If he’s been making on-time payments at a higher rate, has equity and good credit, let it be. This is similar to the FHA and VA streamline programs except FHA and VA care little or not-at-all about existing equity.

In the third example (fog-the-mirror example without employment or income), if you have that much skin in the game (30% down) and you have good credit, you are a fair credit risk in my view.

We just don’t know what we don’t know about you. But, if you invested that much money in the property, it’s most likely you can sell the property and recover some equity before the lender starts to worry about you mailing the keys back.

This assumes there is no stress in the economy that could cause property values to plummet.

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Jeff Lazerson - Mortgage Columnist since 2011