You’d think that by owning four thriving businesses, Glen and Heather Hankins would have no problem buying a dream home for their growing family. Not so. His application for a jumbo loan was rejected by three major banks because he didn’t meet the underwriting guidelines.
They kept shopping and ultimately prevailed, a year later than planned. They moved in July to Inverness from Elk Grove Village.
“The process was so frustrating,” said Glen Hankins, whose primary business, Elk Grove Village-based Powerhouse Restoration, provides disaster relief, repair and rebuilding services. “You know what you can afford, but you’re stuck with those guidelines. If you don’t meet those numbers, they don’t want to give you the loan, regardless of anything else.”
At his last turndown, a sympathetic loan officer referred him to David Goldhirsh, a Chicago mortgage banker and vice president of Overland Park, Kan.-based LeaderOne Financial Corp. That’s when things started looking up. The lender said yes, and the Hankinses went from making an offer to closing in about 45 days.
“After we knew we were looking good financially, everything happened very quickly,” Hankins said. “We felt comfortable putting in offers, which we weren’t prior.”
Usually, it’s the first-timers, who may be less established in their careers and creditworthiness, sweating whether they can get a mortgage. But certain high-net-worth buyers have no guarantees either. For a variety of reasons, they cannot qualify for financing the home they want with traditional lenders. These borrowers include entrepreneurs, business owners, investors taking depreciation on assets, and retirees with substantial assets but not huge incomes.
“It’s a struggle for a portion of the upper-end market,” said Jim Kinney, vice president of luxury home sales for Chicago-based Baird & Warner. “During the heydays, we saw a lot of self-employed people taking advantage of stated-income or no-doc loans, which are now mostly gone. Most people did for expediency because of the way they make money, but the fraudulent people didn’t have money to begin with and planned to default.”
“There are millionaires with perfect credit being told they can’t get the same terms as someone with a 620 FICO score,” Goldhirsh said.
That’s because most lenders don’t keep the loans they make. They sell them, notably to Fannie Mae or Freddie Mac. Before these government-sponsored agencies accept a loan, they must be confident it will be repaid. They require various aspects of the borrower’s financial profile such as credit score, income and assets to conform to prescribed guidelines, or they won’t deal. A FICO score of 620 is generally the minimum for conforming loans.
“If the loan amount is over the Fannie-Freddie limit, which is currently $417,000, it falls into the jumbo category, and the guidelines become even more restrictive,” Goldhirsh said.
Today, these buyers have more mortgage options. A smattering of mortgage banks and other lenders, including LeaderOne, has started to court them with an array of new or revamped loan products and programs. The guidelines haven’t loosened, but because the lenders typically plan to keep the loans in their own portfolios, they may not interpret them as literally.
In addition, a few private equity firms and investment companies are starting to buy jumbo loans again, which expands the marketplace for lenders who make them, said Ken Perlmutter, president of PERL Mortgage Inc. in Chicago.
Here’s a closer look at two of the newer loan programs:
Pledged assets. Borrowers who have significant stocks, bonds or mutual funds may not want to liquidate them for a down payment. Doing so could trigger hefty capital gains taxes or cause loss of interest or dividend income. A pledged assets program allows the borrower to make a smaller than usual down payment in cash and allocate some assets as collateral against a loan for the rest. The pledge is released when the loan is repaid. Meanwhile, the assets continue to grow.
“Stock prices have been going up,” Perlmutter said. “Many people don’t want to sell at this time.”
“When people have their assets tied up in business lines of credit, they can’t just go sell something,” Goldhirsh said.
Asset depletion. Some high-net-worth borrowers don’t show enough adjusted gross income on their tax returns to qualify. With an asset depletion loan, the lender factors the borrower’s liquid assets into the income calculation. The asset amount, less the down payment, is amortized over 30 years or until the borrower reaches age 85, whichever comes first, just as if the money were spent during that time.
For example, suppose a 50-year-old borrower has $2 million in liquid assets after making a down payment. He has an adjusted gross income of $10,000 per month, but needs $15,000 per month to qualify for the desired loan amount. The lender amortizes the $2 million over 30 years, and, assuming a 5 percent annual rate of return, counts another $10,736 toward the borrower’s monthly income. That’s more than enough to qualify.
“Each investor has its own different formula,” Perlmutter said. “Some underwriters are more aggressive than others, say, in calculating earnings.”
Other specialized mortgage products include loans to foreign nationals and doctors in residency, cash-out refinances up to $500,000, and condominium loans for certain new construction projects and existing buildings with high percentages of nonowner occupants.
“If someone feels shut out of the traditional market and really wants the property, we can usually put the deal together,” Kinney said. “But it’s not a cookie-cutter process.”
That’s how it worked for the Hankinses. According to their financial profile, Glen Hankins’ income can swing widely from year to year. He had a limited credit history because he pays cash for most purchases. Only Heather Hankins is named on the title and mortgage of their Elk Grove Village home, leaving her husband with no verifiable mortgage payment history. And the couple didn’t want to sell the property because its value plunged when the real estate market crashed.
These circumstances weren’t a problem for LeaderOne, which tailored a five-year adjustable rate jumbo mortgage with a 30 percent down payment.
“He had good compensating factors, and those are important for getting a loan outside the box,” Goldhirsh said.
Perlmutter said he expects the jumbo market to continue to expand.
“People are feeling a lot more positive,” he said. “More investors are coming into the space, and interest rates are nearly the same as for conforming loans. For buyers, their options are much greater than they have been for the last few years.”