Array of mortgages cover hard-to-qualify properties, borrowers

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | June 7, 2024

Article originally posted in Orange County Register on May 30, 2024.

Once again, the mortgage world has a huge portfolio of mortgage programs that may get outside-the-conventional box borrowers qualified.

Let’s start with every mortgage loan originator’s favorite heart-burning challenge: the so-called non-warrantable condominium.

Ever since the Champlain Towers collapse and tragedy in July 2021 in Surfside, Fla., Fannie Mae and Freddie Mac have been aggressively vetting condo projects across the United States. Does the project have 100% insurance replacement coverage? Does it have a healthy budget and cash reserves? What about deferred maintenance and repairs? Are there construction defect issues or lawsuits? Are there too many investors owning in the complex (investor concentration)?

If the project is either Fannie or Freddie approved, it is considered a warrantable condo (the mortgage is eligible for sale to either of the mortgage giants). Both agencies tend to have the best consumer pricing.

Your mortgage loan originator should check such project eligibility ahead of you writing an offer.

If you are stuck with a non-warrantable condo, the good news is you can get mortgage financing. The bad news is you can’t get away with a minimum 3% to 5% down payment. And you will be paying a higher interest rate.

The best rate I could find was 8.75% on a 30-year fixed rate, requiring a minimum 15% down payment. That is a good 2 points higher in rate than a standard, conventional 30-year fixed rate through Fannie Mae or Freddie Mac.

Also keep in mind, the approval isn’t automatic with a non-warrantable mortgage. For example, if there is construction defect litigation going on, assuming the case isn’t settled and the repairs are not completed, it’s doubtful there is any mortgage available.

Income restrictions

How can one qualify if he or she doesn’t show enough tax return income?

There is an abundance of exotic mortgage programs or so called nonqualified (non-QM) mortgages that just might get a loan approval. These programs take a different approach from the standard W-2s and tax returns to proving the ability to repay.

The most used loan is the 12-month bank statement program. Essentially, a self-employed borrower can put as little as 10% down. The lender will consider the most recent 12 months of business bank statements. All deposits will be added up and divided into 12 months. From there, an overhead factor is used for running the business.

Say it’s an architect working at home. The 12 months of deposits add up to $175,000. Let’s say the overhead haircut is 20%. So, it’s $175,000 minus 20% which comes to $140,000. Then, divide it into 12 months. The qualifying monthly income lands at $11,666. Not bad.

There are programs allowing independent contractors to qualify simply from the 1099s with just 10% down.

How about getting a profit and loss statement signed by your CPA or an enrolled agent? That’s another way to qualify without using tax returns.

My all-time favorite is the fog-the-mirror mortgage. All you need is 20% down, good credit and mortgage payment reserves. The employment section of the application and the income section of the application are left blank. This program is exempt from any type of ability to repay proof.

For investors, a popular option is the debt service coverage ratio program. You’ll need at least 20% down. And the rental income for the property must be at least $1 more than the total house payment to qualify. Say the payment is $4,000. Your rental income would need to be at least $4,001.

Lenders are offering mortgages to foreign nationals, even without a green card.

They’re also offering mortgages to borrowers without Social Security numbers but with individual taxpayer identification numbers.

The more the down payment or the more equity in the case of refinancing, the better the pricing will be.

The lowest middle FICO score of all borrowers matters too. The better the score, the better the pricing.

In general, rates for these mortgage programs run between the 7% and 9% range.

Freddie Mac rate news: The 30-year fixed-rate averaged 7.03%, 9 basis points higher than last week. The 15-year fixed rate averaged 6.36%, 12 basis points higher than last week.

The Mortgage Bankers Association reported a 5.7% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed-rate on a conforming $766,550 loan, last year’s payment was $123 less than this week’s payment of $5,115.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6%, a 15-year conventional at 5.875%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 6.25% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 6.875%, and a jumbo 30-year fixed at 7.125%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year VA at 6% with one point.

Jeff Lazerson, president of Mortgage Grader can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.