8 Places to Go When Your Mortgage Lender Says No
By: Dona DeZube Published: February 4, 2014
New
mortgage rules draw some pretty clear lines about who should -- and shouldn’t
-- get a mortgage. If you fall outside the lines and your lender says no, you
have eight other options.
New
mortgage rules are pretty clear about what you have to do to convince a lender
you’re a qualified mortgage borrower. Meant to measure your ability to repay,
the new rules created a list of eight things lenders had to check to
make sure you could repay your mortgage.
Those
protections help ensure we’re not going to see a repeat of the mortgage crisis
any time soon. The new rules are also designed to reward banks for staying away
from risky products like interest-only loans. But if you can’t meet any of the
eight standards you’re going to find it harder to get a new mortgage or
refinance your existing mortgage.
The
NATIONAL ASSOCIATION OF REALTORS® predicts the changes will slice about 5% to
7% of borrowers out of the market.
Where
do you turn if you’re in that 5% to 7% or you like your balloon loan and want
to refinance into another balloon loan?
The
fine print in the new rules created some exemptions that you can use to try
again if you don’t meet one or two of the eight qualified mortgage checks, or
if you want to go with a loan product that the rules discourage lenders from
making.
1.
Your State Housing Finance Authority
State
Housing Finance Authorities specialize in helping first-time and
low-to-moderate income homebuyers and homeowners. They’ll often give you a
below-market interest rate or the option of putting down as little as 3%.
In
exchange, you’ll likely have to agree to complete a financial education course
and prove every penny of your income.
Historically,
HFAs have had much lower rates of late payments and foreclosures than
for-profit lenders, so they’re exempt from the rules.
2.
An Itty-Bitty Bank
Banks
and credit unions that have less than $2 billion in assets and make
500 or fewer first mortgages don’t have to follow the same rules as larger
lenders.
That’s
because they didn’t make the risky loans that led to high foreclosure rates
during the mortgage crisis. Plus, they tend to hold on to the loans they make
(rather than selling them to investors). That makes it easier for the bank to
work with customers who run into financial trouble.
Small
lenders can charge higher fees and interest rates than big banks, which they
need to do if you have a tiny loan amount, because some fees, like a title
search, cost the same no matter how big or small your loan is.
If,
for example, you had a $20,000 mortgage, the fee cap would limit you to $1,000
in fees, which probably isn’t enough to cover a title search and appraisal.
Although the bank would still earn interest on your loan, it would have to pay
the fees for you -- and no bank wants to do that.
Some
small lenders can still make balloon loans, where you owe one big payment at
the end of your loan. A balloon loan has a lower monthly payment than a regular
mortgage loan where each month you pay back some of the money you borrowed
instead of just interest.
The
catch is that the small lender has to hold on to your loan for at least three
years and can’t sell it into the secondary market.
So
you’ve got to persuade the bank that your mortgage is a good investment. Small
bankers can be very conservative lenders, which is another reason they didn’t
end up with a lot of foreclosures on their hands during the real estate crisis.
Right
now, any lender who meets the size rule can use the small lender exemption.
Starting Jan. 10, 2016, only small lenders in rural underserved areas will
get to use the exemption, so don’t delay trying this avenue unless you live in
a sparsely populated place.
3.
A Government-Guaranteed Loan
The
new rules set a clear line for how much of your income, max, you should be
using for debt: 43%. If you’re above that limit because you have too much debt
or not enough income, there’s a work-around.
You
can go over the 43% limit if your loan is guaranteed by Fannie Mae, Freddie
Mac, the Federal Housing Administration, the VA, or the U.S. Department of
Agriculture’s rural housing loan program.
4.
Community Development Nonprofits
Nonprofit
lenders who work with low- and moderate-income borrowers don’t have to follow
the new mortgage rules. As long as they don’t make more than 200 loans a year,
they can create special loan programs to help the people in their community.
Community
Development Financial Institutions set up shop in areas undergoing
revitalization. They target a particular community for assistance, including
homebuyer incentives. CDFI lenders also don’t have to follow the new mortgage
rules.
5.
Homeownership Preservation and Foreclosure Prevention Programs
If
you’re underwater on your mortgage, meaning you owe more than your home is
worth, you can still get a loan from a foreclosure prevention program or a
homeownership stabilization organization. Because these groups have a history
of knowing how to help troubled homeowners, they don’t have to follow the new
mortgage rules.
6.
A Safer Loan
If
you’re in a dangerous, unfair loan right now and you want to refinance into a
safer loan, your lender doesn’t have to follow the eight standards when it
gives you a better loan. There’s an exemption from the ability to repay
standards when a lender is moving a borrower out of:
·
An adjustable-rate
mortgage that’s about to adjust to a much higher payment.
·
An interest-only loan.
·
A loan with negative
amortization (meaning the amount you owe can go up even if you make all your
payments).
Your
new standard loan:
·
Has to have a fixed rate
for the first five years.
·
Must lower your monthly
payment.
·
Can’t have fees of more
than 3% of the amount you’re borrowing.
7.
A Work-Around
If
you’re rich enough that your bank has assigned you a personal wealth manager,
that’s the person to talk to when it’s time to refinance. Your bank will want
to keep you as a customer and will find a work-around to fund your loan.
For
example, if you’re using more than 43% of your income for debt but you can show
you have millions in assets, your personal banker will make the case that
you’re quite able to repay your mortgage even though you don’t meet the
debt-to-income rule.
8.
Another Kind of Loan
The
new mortgage rules don’t apply to all loans. It specifically doesn’t include:
·
Open-ended loans.
·
Timeshare loans.
·
Reverse mortgages.
·
Temporary loans,
including bridge and construction, and the construction phase of
construction-to-permanent loans.
·
Loans from the bank
of Mom and Dad.
If
one of those types of loans will work instead of a mortgage, you won’t have to
meet the new mortgage rules.
