February 6, 2015

Downsizing But Retaining Current Home    

“I am downsizing by purchasing a smaller home that will be my primary residence. Because I do not have my existing house on the market, the lender I approached to finance the purchase has asked me for a letter describing my reasons for the purchase. I intend eventually to sell my current primary home, but for now, I will most likely rent it to a friend for some time. What should I include in my letter that would satisfy this lender”?   

In pricing loans used to purchase a home, lenders distinguish three possible uses of the property. Mortgages used to purchase a house that the purchasers intend to occupy as their primary residence get the best price. The presumption is that borrowers who encounter financial difficulties will exert the greatest effort to stay current on their mortgage if the home in which they reside is at stake. Mortgages used to purchase a vacation or second home will be priced a little higher because second homes are viewed as having a lower priority to the borrower. Mortgages used to purchase a house that the borrower intends to rent out as an investment are viewed as the riskiest of all, and will carry the highest price.  

You intend to occupy the smaller home as your permanent residence, and therefore you should get the best price. Because you do not intend to sell your current house, however, the lender wants assurance that you have no intention of using the newly-purchased house as a second home or an investment. A letter explaining your need to downside and your intention to rent your current house should provide adequate assurance.  

Note, however, that in qualifying for the new mortgage, retention of your existing home will raise the bar for documenting both income adequacy and asset adequacy. The lender will calculate a debt-payments to income ratio that includes the payment on your existing mortgage as well as the payment on the new mortgage. In most cases, lenders cap this ratio at 43%.  While you may generate rental income from your existing house, the lender won’t include it because it hasn’t happened yet. Further, since you will be making payments on two mortgages, the lender will want you to have liquid assets that will cover both payments for 6 months or so instead of the 2 months that is normally required when there is only one mortgage.  

Before finalizing your decision not to sell your existing house, therefore, I would make sure you can qualify for the new mortgage. You can use my qualification calculator to determine this. 

Lender Goofs and Wants the Borrower to Rescue Him 

“I recently completed an FHA streamline refinance, or thought I did. Shortly after the closing I got a call from the mortgage company telling me that FHA won’t insure the loan because it did not include the upfront mortgage insurance premium in the loan balance. The firm to which they sold the loan is requiring them to buy it back, which evidently they have the right to do.  

The mortgage company now owns an uninsured loan that it can’t sell, and it wants me to refinance it into two loans, one a second mortgage, that it can sell, at no cost to me. Am I obliged to do this?” 

No, you are not. Your loan is a done deal and you have no obligation to rescue the lender from the consequences of its own mistake. However, you can be a nice guy and offer to go along, provided the new mortgage (or mortgages) leaves you at least as well off as you are now. But making a determination that one mortgage package is as good as another when the packages differ in interest rate, points, other loan fees, and mortgage insurance can be difficult.  

Because I am curious as to what they will come up with, I am willing to do this analysis for you. Your chances of getting an advantageous deal will rise if you tell the lender that I will do the analysis -- but only one time. 

Lender Closes Loan But Doesn’t Fund it 

“I refinanced a mortgage I had with Lender A through Lender B – or rather I thought I did. All the requirements were met, the closing was executed at my home by a notary, to whom I gave a check for $418. But several weeks later I discovered that the old loan had not been paid off!  Despite numerous phone calls, I was not able to get an explanation from anyone at Lender B, except that the last person I spoke to there told me that the refinance would have to be done over…What should I do?”   

What you shouldn’t do is refinance again with Lender B. What you should do is to contact the notary agent and request the $418 be returned immediately. In addition, write a letter of complaint to the Consumer Financial Protection Bureau, and whatever state agency regulates mortgage banks in your state. You could sue B but it would be difficult  to establish damages and probably is not worth doing. 

Note: The three letters quoted above have been heavily edited for clarity and brevity.