$200k down on $332k house denied fha loan. RMLO private loan???

Question

We have our primary house for sale and under contract for $332,000.  We just found out (10 days before closing date) the buyers where denied their fha loan even though they are putting down around $200,000.  They are self employed and as far as I know the issue was with their business debt/income.  They have excellent credit and cash available.

I have found a private lender that would be willing to write a private note at 6% interest up to $150,000 in first lien DOT.  This is a family member of mine.  We are not sure if the buyers will move forward with this yet but I am trying to get a handle on how this would work and the risks involved.  We will use my Real Estate Attorney to draft paper work and an RMLO if needed.  DOT state

So here are some questions I would love opinions on or education.

1.  Being that it is NOT an owner finance (just a private lender), do the dod frank rules apply?  Specifically no Balloon payments.  Any reason there can NOT be an adjustable rate after 5 years?

2. RMLO to qualify the buyer.  If fha and conventional won't qualify them, why would an rmlo?  As the seller I will remove myself from their personal finances but my private lender will need to see their big picture.

3.  For those of you that hold notes,  what risk do you see here for the private lender.  They will be in first position secured with a Deed of Trust in Texas.  With that high of a down payment we feel risk is limited.  They would ideally require escrow and use a mortgage servicing company.

4.  Is it typical to have the borrower pay the attorney doc prep fees, rmlo fees, ect.  I figure yes as this is why you pay loan origination.

5.  Is my private lender willing to be too generous?  Would YOU loan on those terms?  They would ideally not like the loan to go for 30 years but understand the dod/frank balloon restriction.  Thats why we where thinking of doing an adjustable after 5 years.

They are in turn helping me by doing this transaction, allowing me to close on my next house....(which we stupidly put nonrefundable money down with a builder).  Thanks for any and all opinions.

Mike landry

Dion DePaoli · Answer

Let's take a deep breath and revisit this. First a couple misconceptions. Balloons are not forbidden exactly. The ATR says that any balloon payment within the first 5 years (from the first payment date) must be included in the DTI calculation of the loan. So a loan which balloons in 61 months is fine. The rate of interest on that loan can not make the loan a high cost loan but at the above mentioned interest it would not be.

I would concur with @Chris Mason that income has probably recently risen and it is not being treated right by the lender(s) they have chosen to work with yet. No big deal.

The loan at $132k with 6% down to 10 years would require the household income to be around $5,234 per month. At 15 years they just need $3,978. Point is there is working room for them depending on what they actually do show as income. Stated income loans are not gone. Alt Doc income loans are not gone. Those loans are simply Non-QM loans. It is not unlawful to write Non-QM loans.

The utility of an RMLO in this case is being driven by common misconceptions. Where RMLOs are required to work under a lender license, you actually need the licensed lender to agree to allow the LO to work on the loan. An LO can no more write loans by him/her self than any other person.

Your private lender does not hold a license. The private lender does not own the property. This property will be used as a primary residence by the borrower. So your private lender is required to have a license. The only logical circumvention to this would be the private lender purchases the entire house and then sells it to your relatives and provides seller financing which would give him/her the exemption from license provided he has not written 4 other real estate loans in the last 12 months. (That doesn't just mean in Texas) Since everybody seems like they want to cooperate this might be a viable solution. (Bingo!)

Otherwise, you will need to find a licensee who is willing to write the loan which sounds like it needs to be non-QM.

Chris Mason · Answer

Fannie and Freddie are identical on 95% of things. One key difference that is often relevant to self employed persons, that not everyone is aware of, is that often times for good credit scenarios Freddie Mac requires only one year of tax returns for many categories of self employed persons.

This doesn't sound big, but it kind of is. Often, when does someone want to buy a house? Well, many times, it's right after they just had a killer year income-wise. That's where the down payment came from -- someone's income doubled, but they are smart enough to not have instantly started squandering money, so now they have a down payment saved.

Example with simple numbers:

Suppose 2014 tax returns indicate $50k and 2015 indicates $100k (in both cases, after the lender has done our wonky math and arrived at a number higher than net but less than gross).

Fannie and FHA would both typically require 2 years of tax returns, take a 2 year average, and arrive at $75k/12 = monthly qualifying income.

Freddie, often times, will only require one year of tax returns, and go $100k/12 = monthly qualifying income.

The LO simply must be smart enough to only upload exactly one year, if exactly one year is all the AUS is asking for. No guarantees on that one, a lot of people like giving underwriting way more than they need or want, and underwriters can't un-see what has been seen.

If your buyers balk at the private/hard money route, have them switch over to either your go-to lender, or your listing agent's go-to lender, or someone else you have reason to believe is both a) an LO and b) has an IQ greater than potato.

Michaela G. · Answer

@Chris Mason , thank you! That's a great thing to know. I had no idea

Wayne Brooks · Answer

Dodd Frank applies to All lenders on owner occupant loans, not just owner occupants.

Mike Landry · Answer

Thanks everyone for the valuable information in this thread.  The buyers decided to not pursue it and are going to rent until they can qualify with conventional.  I suspect they had other issues with business debt.  Back on the market!!

Mike Landry · Answer

@Michaela G.

I like your creativity.  We do have a mortgage balance of about 220,000.  So it would all have to happen simultaneously?

I'm not sure it would work in this case.  And while they could "subject to", we could also just write it as assumable to not stay on my credit. Or just write the loan to them initially.

Mike Landry · Answer

@Chris Mason  I'm trying to figure that out too but I don't want to get too nosy as this transaction does have realtors representing both sides.  According to their realtor they applied for conventional and where denied pre approval (just now finding out).  Then got pre approved with an FHA.  We should have been suspicious from the start.....and we where...but they where putting down almost $200,000....

Is Freddie Mac smaller/easier than fannie for approval?

Chris Mason · Answer

Hi @Mike Landry,

Something is being left out. If they have solid credit and (clearly) a solid down payment, why were they going FHA to begin with?

It sounds like the issue is the delta between true self employment income and mortgage qualifying self employment income. Generally, that delta is smaller using Freddie Mac financing than when using FHA.

Michaela G. · Answer

I don't know anything about this, so, I'm just thinking:

Could that relative give you a loan for 150K, with a lien against the house and then have the buyer buy 'subject to' that loan?

$200k down on $332k house denied fha loan. RMLO private loan???

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