New loan options for self-employed with stash of cash

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | December 18, 2024

Article originally posted in Orange County Register on December 12, 2024

Last week, I went to the Originator Connect holiday party and conference in Irvine. It was a good opportunity to sniff out innovative mortgage financing tools aimed at helping consumers just like you.

For me, the find of the day was a home equity line of credit (HELOC) allowing bank statement deposits to be used as an income qualifying substitute for tax returns.

I’ve come across bank statement fixed-rate second mortgages, where an applicant must pull all the money out at once, but I’ve never come across this concept for HELOCs.

The big advantage with a HELOC is it allows you to borrow and pay it back, sort of like a business line of credit or a credit card, but at significantly cheaper rates.

Many self-employed borrowers can show a nice flow of income through bank deposits, but the money doesn’t translate well enough when it comes to claiming enough qualifying net income on a tax return. Legitimate (or even illegitimate) expenses claimed on tax returns whittle down the taxable income. Hence, the bank statement loan program works for those who are unable to meet “full documentation” income and debt-ratio qualifications.

What’s the catch? A borrower is going to pay a higher rate and more fees on this HELOC compared with a standard bank HELOC. Beggars can’t be choosers. If you can’t get a bank HELOC, you may be able to get a bank statement HELOC.

Here’s an example:

$500,000 loan, 75% loan-to-value and 740 middle FICO score offers a start rate of 10.125%. Assume points and closing costs of $7,000.

Compare that to a full doc (tax returns to provide the income) bank HELOC, to which you might be paying zero costs with a starting rate of 8.25%.

Among the program highlights: This twist on a HELOC is available for owner-occupied residences, second homes and investment properties. The maximum loan amount is $750,000.

The borrower must pull out at least 80% of the line amount at closing. You cannot pay any of it back for 90 days. It’s a 20-year term. You can borrow and pay back for the first five years at interest-only payments. A borrower will have an additional 15 years to pay the line back. Also, you can pull out as much as 85% of the equity from your property.

American Business Media (the conference organizer) arranges 30 shows a year around the United States. I asked the director of events, Navindra Persaud, what was the hottest topic for mortgage brokers these days. “Navigating higher (mortgage) rates and finding diversity to their (consumer) product offerings,” he told me.

Speaking of diversity, another very interesting program is another version of fog-the-mirror lending (if you can fog a mirror, we’ll give you a loan).

If you have the same or more liquid assets compared with the loan balance, no questions are asked about any job or income. That section of the application is left blank. For example, you are applying for a $750,000 mortgage. You are currently unemployed. And you can show $750,000 of money between your bank and brokerage accounts. You qualify for this fog-the-mirror-2.0 loan.

As an aside, fog-the-mirror 1.0 includes no job or income, just nine months of payment reserves and excellent credit. No need to be able to match your mortgage balance with your liquid assets. Fog the mirror 1.0 carries an 8-8.5% interest rate on a 30-year fixed with about 2 points cost. The version 2.0 rate is between 7.5% and 8% with 2 points.

Other exotic loans

Mixed-use: More and more new buildings are offering a combination of retail space and homes. Industry jargon for this is “mixed use.” For the most part, it’s hard to find mixed-use financing. One lender allows residential or commercial zoning for two to eight units, with a loan amount up to $2 million. Not bad. The rate is roughly 7.25% for a 30-year fixed with 2 points.

Foreign borrowers: ITIN (individual taxpayer identification number) in lieu of a Social Security number, DACA and foreign national loans all were on display. The foreign national loan required zero U.S. credit, so long as the borrower is putting at least 30% down. The investor-borrower cannot reside in the U.S. Talk about the world being your oyster.

When mortgage shopping and there seems to be nothing you want or need, be sure to have at least three mortgage brokers tell you the same thing: “It’s not out there.” Otherwise, keep looking, because you just might find a program that fits your needs.

Freddie Mac rate news: The 30-year fixed rate averaged 6.69%, 12 basis points lower than last week. The 15-year fixed rate averaged 5.96%, 14 basis points lower than last week.

The Mortgage Bankers Association reported a 2.8% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $183 more than this week’s payment of $5,199.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625%, a 15-year conventional at 5.5%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.99% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high-balance conventional at 6.5% and a jumbo 30-year fixed at 6.375%.

Eye-catcher loan program of the week: A 30-year mortgage, with 30% down, locked for the first 5 years at 5.875% with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.