Borrowing against your home can be tricky during financial emergencies

By Jeff Lazerson

10/13/17

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 3.91 percent, up six basis points from last week’s 3.85 percent. The 15-year fixed averaged 3.21 percent, also up six basis points from last week’s 3.15 percent.

The Mortgage Bankers Association reported a 2.1 percent decrease in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.47 percent and payment of $1,897 was $106 less than this week’s payment of $2,003.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at one point cost: A 15-year at 2.875 percent, a 30-year at 3.625 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.0 percent, a 30-year agency high-balance at 3.75 percent, a 15-year jumbo (over $636,150) at 3.5 percent and a 30-year jumbo at 3.75 percent.

What I think: A desperate homeowner came to me for help after her lender filed a notice of default, seeking to foreclose on her for non-payment.

The homeowner, whom I am calling Hard-Luck Harriet, was caught up in some difficult financial circumstances that can happen to any of us. She had plenty of home equity that, in theory, she should be able to just pull out quickly through a hard money lender to cover the back payments, penalties and foreclosure costs.

Hard-Luck’s credit rating went south due to the missed mortgage payments and the notice of default. So, a regular A- paper refinance was out.

She couldn’t even qualify for a hard money (high-rate and high-cost) loan because she could not document sufficient income for a “consumer purpose loan.”

What about other assets? Hard-Luck Harriet owns a rental. And, yes, she has enough equity in the rental to be able to pull some out through a hard money loan.

Mortgages for rental properties are generally considered business purpose loans. The consumer purpose “ability to repay” standard that lenders must meet for owner-occupied loans generally doesn’t apply when it comes to rentals.

In this case, it probably does apply because the loan proceeds are used for a consumer purpose.

Yes, you read this correctly. Hard-Luck Harriet owns properties in which there is sufficient equity to cure the debt, but she can’t tap into that equity.

For all consumer purpose loans, the burden of proof is on the lender to show the borrower has the ability to repay the loan. If the mortgage goes bad, and the borrower does not pay, the lender could be forced in court to rescind that entire loan during its first three years.

Ask any mortgage lender. That story is more common than you think.

Homeowners find themselves either forced to reach out to family and friends in embarrassment and humiliation for help or sell to preserve any remaining equity.

The only other way to buy some needed time and possibly reorganize one’s debts is to file bankruptcy.

Something seems off here when it comes to consumer protection laws. This rule should be amended. Hard luck emergency exceptions should be allowed.

Do yourself a favor. Always have cash reserves. Always have a backup plan. You never know when you might unexpectedly find yourself in financial straits like Hard-Luck Harriet.

If you have questions or comments, please contact Jeff Lazerson by clicking here.