Friday, November 22, 2013

Ask the "Mortgage Man": END TO AN OLD TRICK

Ask the "Mortgage Man": END TO AN OLD TRICK: Have you or anyone you know ever moved into a different home without selling the current residence?   Did you claim to be renting your resid...


Have you or anyone you know ever moved into a different home without selling the current residence?   Did you claim to be renting your residence or selling it, all to get the best terms for a mortgage on an investment property? For years, many people used this ploy to get better terms for their loans.  This went on for years before lenders became smart.  When I got into the industry in 1986 as an underwriter, I was taught what to look for to determine true occupancy in a property.  With a few general questions you can determine a borrower's intentions with regards to the property.  If their commute distance from their current job to the subject property is 2- 3 hours away from the property, it is obvious that they are looking at the property as either a 2nd home or an investment property.  If they claim that the home will be a 2nd home, but it is located in downtown Allentown, you can conclude that it is to be used for investment.  To be considered as a 2nd home, the property must be located in a resort area or community where it is common for home owners to use them on weekends. If a buyer is moving from a home in which they owe more than the total price of the new home being purchased,  you can assume that the are either going to let their current home go into a short sale or foreclosure.  In 1983 in Houston Texas, the oil industry suffered a bad slump.  Many workers in that area were effected by the slump, and may lost their jobs.  Prices of homes dropped significantly, where many builders went bankrupt.  Buyers were purchasing the exact same home to theirs, in the same development, for 60% less money.  Why pay on a mortgage for a home that is worth 1/3 of what they owe on the home? Many claimed they were renting their current home and purchasing a new home.  When they completed the sale, they walked away from their old mortgage; therefore, the banks lost significant amounts of money. This trick worked well for a time, but the banks eventually put a stop to that.

Since the mortgage crisis of 2008, Fannie and Freddie Mac implemented changes in underwriting
guidelines which help to keep these fraudulent activities from happening.  If a buyer states that they will be vacating their current home and buying a new one, they must qualify with the new home mortgage as well as the old home, too.  If they brandish a lease, underwriters will not count any of the rental income until a borrower can provide proof that the home has been rented for 6 months.  This means that the buyers will have to vacate their home and rent for a minimum of 6 months before they can look to buy unless they qualify with both properties in their name.  Furthermore, if their current home doesn't have at least 30% equity, the borrowers must provide proof that they have 6 months mortgage payments on both properties saved in reserve.  Depending on the cost of the new home, you can be looking at tens of thousands of dollars needing to be shown in savings, 401k plans, IRAs, etc.  What seemed to be a fool-proof plan years ago, is becoming more and more difficult to pull of in today's market.

Andy Williams #118317
Abacus Regional Mortgage NMLS #112984
484 695 5972