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About Sub-Prime Mortgages

Closing Costs Financed

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Lenders usually allow all closing costs to be paid through the the refinance; except for the house appraiser. As such, except for the cost of the appraisal, refinancing is ordinarily a zero “out of pocket” transaction. However, some lenders do also require an application, processing and/or credit fee to be advanced by the borrower in addition to the appraisal fee.

Secondary Financing

Lenders allow secondary financing (2nd mortgages) up to 100% CLTV (Closing Loan To Value). For example; if the outstanding balance owed on your first mortgage is 80% of the value of your home, lenders offer 2nd mortgage loans up to 20% of the value of your home in addition to that first 80% LTV (Loan to Value) mortgage. Thus, your existing 1st mortgage would stay intact “as is”; and a new 2nd mortgage would be added to your debt on top of the 1st mortgage.

The primary advantage to secondary financing is that closing costs are substantially less than closing costs associated with a complete refinance of a 1st mortgage. A disadvantage to secondary financing is that in proportion to amounts borrowed, monthly payments tend to run significantly greater than monthly payments associated with 1st mortgages. This is because with 2nd mortgages, interest rates usually run higher and the numbers of years allowed for paying back the loan are usually less.

As a general rule, if your planning to sell your home within the next 2 years, secondary financing may make sense. However, if you plan to stay where you are for more than 2 years, from a cash flow standpoint, it may make sense to refinance your entire first mortgage to optimize your monthly bottom line.

On the other hand, if cash flow is your primary concern, once you’ve selected a lender, you might want to ask your loan officer to run the numbers both ways (for secondary financing and complete refinance) so that you can select your best option.

Deed Transfer/Refinance

A Deed Transfer/Refinance is much as it sounds. It is a purchase transaction in effect. In most cases it is required that the transfer be made from a family member or close friend. A refinance is ordered on the subject property by the new potential owner and the deed to the property is transferred simultaneously with the closing of the refinance. With the correct set of circumstances, this can be done as a “no money down” transaction with all closing costs financed into the deal.

Fast Closings / Fast Cash

Most lenders actually have the ability to arrange “the lender’s part of the job” for a fast closing in as little as 48 hours. However, no matter how adept they might be, they remain human and are also at the mercy of the title search and real estate appraiser’s schedule.

Although we have seen rushed closings come together in 3 business days, a super rush almost always takes 5-7. Beware of promises from any mortgage lender or broker that promises a 3 day turn around. If cash flow is pressing, try to plan accordingly. If they tell you 3 days, count on 7-10.

100% Financing

There are non-conforming lenders that offer one hundred percent (100%) refinancing. Higher credit scores can get offers for 100% refinancing all within one (1) first mortgage. Lower credit scores are usually offered an “80/20 combo” which is an 80% LTV (Loan to Value) first mortgage in combination with a 20% LTV second mortgage.

Home Loans after Divorce

Home Loans can usually be obtained by either spouse after divorce for a fresh start for both purchasing a new home or refinancing an ex-spouse off of the deed.

Refinance Ex-Spouse off of Deed / Pay off Ex-Spouse

Provided you are in agreement with your ex-spouse about a settlement amount; and there is sufficient equity in the subject property, this can usually be accomplished as follows: A refinance is ordered in the name of the soon to be sole owner. At closing the refinance is funded paying off the existing mortgage plus the settlement amount to the ex-Spouse. Simultaneously a new deed is transferred to the new sole owner of the property.

Often the new owner/borrower is able to draw cash out funds from the same refinance to pay creditors, clear up credit issues and/or cash out for other personal reasons. It is usually also possible to use the same type of refinance and simultaneously add names to the new deed such as a new spouse, family members and/or other third party(s) that may want to share in the ownership and mortgage responsibility of the subject property. This can be helpful if stronger credit of the third party and/or the combined income of joint borrowers can bring upon a lower interest rate—thus a preferable monthly payment.

Credit Damaged by Divorce or Ex-spouse

Everybody’s life situations are personal, individual and rarely are any two divorce annals identical; nor are they often uncomplicated. The right lenders view divorce as an acceptable reason for credit problems. It’s well known that a divorce can damage the credit of a credit worthy person.

Some lenders understand this; and unfortunately, some say they understand it—but actually do not understand it at all. Many lenders do not see the “whole picture” and therefore take the position that a borrower’s credit was not damaged as a result of divorce because the derogatory history stretches over too long of a time period prior to the actual time of the divorce. Some say the interest rate offered should be high due to the risk factor. Others refrain from making an offer.

However, the right lenders do understand that although sometimes a divorce can be triggered by a seemingly “overnight” situation, it is usually not caused by an overnight experience. As such, when divorce is a factor and a long term credit damaging history prevails, the right lenders may increase interest rates moderately to offset some lender risk, but not do so abusively. Success in dealing with these situations can be simplified by knowing which lenders understand divorce and which do not.

Home Equity Lines of Credit

A Home Equity Line of Credit is a “revolving loan”. It is usually in the form of a first mortgage. However, it can be a first, second or third position mortgage. In effect, it works like a low interest rate credit card, but it is secured against your home. Borrowers can draw all or part of the credit line as desired.

Pay Creditors at Closing - Collections / Charge Offs / Tax Liens / Judgments

When refinancing, most lenders allow any creditor to be paid at closing; including collection accounts, charge offs, tax liens, judgments and/or other creditors. When timely closings are required due to purchase contracts or agreements between a Buyer and Seller, this can help meet those time requirements.

Leave Collections Unpaid at Closing

If you owe money on one or several unpaid collection accounts, some lenders will allow you to close and leave those Collection Accounts Unpaid at Closing if either of the following applies:

  • On virtually any collection account having less than $1,000 balance.
  • On virtually any dollar amount for collection accounts that are at least two years old.

Prior Bankruptcy

Depending on how long ago the bankruptcy, the greater your chances for a conforming rate mortgage. In addition, there are some lenders that provide almost conforming rates with bankruptcy discharged or dismissed only one year prior. That is in the case of a chapter 7 bankruptcy. In the case of a chapter 13 bankruptcy, there is usually no need to wait until discharge has seasoned.

Current Bankruptcy

If you are currently in chapter 13 bankruptcy, you may be able to qualify for a home loan. In fact, some lenders can actually provide FHA loans at low interest rates for borrowers in chapter 13. re: HUD Handbook section 4155.1 Rev-4:

“A borrower paying off debts under Chapter 13 of the Bankruptcy Act may also qualify if one year of the pay-out period has elapsed and performance has been satisfactory, and the borrower also receives court approval to enter into the mortgage transaction.”

Prior Foreclosure

Depending on how long ago the foreclosure, the greater your chances for a conforming rate mortgage. However, most mortgage lenders are generally more conservative when a previous foreclosure is involved. As a general rule, if the foreclosure is at least 2 years old, wholesale nonconforming rates can usually come fairly close to conforming rates. If the foreclosure is more recent, offers with higher rates and lower LTVs (Loan To Values) should be expected.

Current Foreclosure

If you are trying to refinance your home while it is currently in foreclosure, the following extenuating circumstances and/or compensating factors may apply:

  • Lower Debt Ratio
  • Substantial Down payment towards the refinance
  • Explanation such as illness, loss of employment, family death
  • Explanation why your financial situation has improved and will continue to be stable in the future

If you are trying to refinance your home while it is in foreclosure, consider the the following: sometimes you can. If you can’t prove your income, you can usually borrow up to 50% of the value of your house. However, if you are able to prove your income, then you can usually borrow up to 65% of the value of the house.

Some people are able to convey a deed transfer to a close friend or relative while simultaneously refinancing the property in the name of that 3rd party. If that individual is credit worthy, often up to 90% of the value of the house can be borrowed which is usually enough to satisfy or otherwise negotiate settlements with the current mortgage company or other creditors. This will often give the distressed homeowner a chance to re-establish some credit and within a year or so, take the house and a new mortgage back into his or her name; thus relieving the friend or relative of any further obligation.