Reduced documentation and other mortgage loans
Two years ago, Brian Simonetti wanted to take advantage of low interest rates to refinance and consolidate his mortgages on a few properties.
It took six months for Simonetti, a self-employed accountant from Massapequa, to go through the application process with his bank, where he had been a customer for 10 years. He sent the bank two years' worth of personal tax returns, corporate returns, bank and brokerage statements going back six months and multiple letters and other documents verifying his business background.
Because Simonetti is self-employed, he wasn't able to provide the bank with a W-2 or other third-party confirmation of his income, and his application was denied, even though he had enough money on hand to pay back the loan. Simonetti then turned to a Long Beach mortgage broker, who introduced Simonetti to a reduced-documentation loan.
Simonetti says he sent his new bank several pay stubs, and some of the same documentation he'd sent his old bank. The deal closed within two months.
"It's more streamlined," Simonetti, 46, says.
The reduced-documentation loans are among several niche products offered by smaller lenders. Mortgage experts are quick to point out that they are not the same as the so-called liar loans believed to have helped precipitate the credit crisis, in which home buyers stated their income on a form and got a mortgage without providing proof.
"These are post-credit-crisis products," says Guy Cecala, chief executive and publisher of Inside Mortgage Finance, a trade publication based in Bethesda, Md.
Cecala explains that the niche loans are made more selectively, mostly by portfolio lenders who keep the loans on their books, instead of securitizing them and selling them off. "They tend to be, in their own ways, pretty strict," Cecala says of lenders.
Some lenders can require as much as a 50 percent down payment for these types of low-documentation loans, along with proof that a borrower can cover closing costs and has reserves in the bank, says Igor Noble, owner of Great Northern Mortgage Corp. in New York City, which works with home buyers from Long Island. Interest rates also are higher -- around 4.875 percent for a 30-year fixed mortgage.
Fred Rossi, president of Riverside Funding Corp., the Long Beach broker that worked with Simonetti, says low-documentation loans can be good for small-business owners with complicated tax returns.
He says underwriters at large banks are not well equipped to do the required analysis of complicated returns. Lenders also take a close look at assets and the ability of the borrower to repay the loan. "It's absolutely not a stated-income product," Rossi says. "It's a reduced-documentation product that doesn't rely on tax returns."
Gregory Frank, manager of Guaranteed Rate, a Garden City mortgage company, says there are three main qualifying requirements for low-documentation mortgages: The client must have healthy assets, clean credit and be self-employed or own a business for at least three years, with proof from the state that the business is legitimate.
ASSET DEPLETION LOANS
Along the same lines of a low-documentation loan are mortgages for people who have substantial liquid assets but not much in the way of income.
For something called an asset depletion loan, banks have a formula they use to calculate a monthly income amount based on the amount the borrower has in savings.
For example, Frank had a client who purchased a $3 million home and was putting 50 percent down. After closing, she had $7.5 million in savings from her divorce, and that was more than enough to qualify her for the loan.
Assets can be used as collateral. In rare circumstances, Frank says he has come across clients who don't want to liquidate a stock, IRA or 401(k) to purchase a home, or they would like to use the collateral in another property in lieu of a down payment. In that case, they take out a pledged asset loan, using the asset as security for a down payment.
Banks come up with a formula, lending, for example, $600,000 to someone with $700,000 worth of securities.
"It's much riskier for the borrower," Frank says. "If the bank is going to allow you to do this deal, they're going to protect themselves."
If the borrower goes into default, the lender can access the borrower's stocks or bonds. While that could be risky in today's market, Noble says lenders would likely take stocks with conservative returns, say 3 to 4 percent, and not something volatile, such as Google or Facebook stock.
"They're going to probably take stocks that are not aggressive stocks," Noble says.
These types of asset-based programs are not for the average person with a stock portfolio or retirement account, says Michael McHugh, president and chief executive of Continental Home Loans in Melville and president of the Empire State Mortgage Bankers Association.
"You're not talking about the average self-employed person," McHugh says. "You're talking about a very high-end borrower."
These types of loans also are more commonly provided by a bank that already has been working with a borrower, says Zahra Jafri, president of Lynx Mortgage Bank in Westbury. "If you have a private banking relationship, then perhaps they'll just base everything off your assets," Jafri says. "They may look at your income and provide more flexible guidelines."
Another trend -- people who use old loans in new ways.
Reverse mortgages, for example, are home equity loans that give senior citizens -- people at least 62 years old -- access to money without the burden of monthly payments. The loan is repaid when the borrower sells the house or dies. Noble says some of his older clients have used the government-backed program to buy houses.
Someone who is 62 or older and retired likely won't have the monthly income needed to qualify for a regular mortgage. If they have enough for a sizable down payment, seniors who are looking to downsize or move closer to relatives may be able to take advantage of what is called a Home Equity Conversion Mortgage for Purchase to buy a new primary home, using cash to pay the difference between the money from the mortgage and the sale price of the home. Noble had a client who was 85 years old purchase a house in Old Westbury this way, putting down $400,000 on the $900,000 property.
It's also becoming more common for older people to buy a home this way together with their children or grandchildren, Noble says.
Noble says the mortgage insurance on these loans can be very high, but the lenders that offer these reverse mortgages have what are called "saver programs" that allow seniors to borrow less money but with lower closing costs.
When the borrower dies, the procedure is the same as when a reverse mortgage is used to refinance a home. The beneficiary can sell the house and pay the lender back or refinance under their name.
Recently, some wealthy home buyers have been paying for homes in cash, then taking out a home-equity loan after the purchase.
"It's easier to get a mortgage on a home you already own than on one you want to buy," Cecala says.