No you can't

Posted: Jun 07, 2007 9:21 PM

I have written about five or six columns about the nuances of the mortgage industry showing borrowers and would be borrowers what they can do to improve their situation with loans and programs that are already on the books. This column is dedicated to practices that you, the borrower can't do even though it makes sense to you. This will give you a view of how the lenders think and about how far you can go.

For the most part you cannot pull out unlimited amounts of cash from your property even though you have the earnings, the loan to value is in line and in reality it's your money anyway. I once did a loan with a sub-prime lender where I pulled out about $1.8 million in cash from a property that was valued at about $5.5 million. The cash came out in a $3.2million dollar loan on the borrower's primary residence and the cash was used to purchase land for his business. The lender had a very difficult time trying to sell the loan and will not allow more than about $500,000 in cash out at this time.

All lenders have limits on cash and my best guess is because once you reach $100,000 over the current loan the interest isn't tax dedcutible. Deep down I believe they feel that the borrower may be "selling" them the property by taking maximum cash out. I have never been able to get a definitive answer from any lender. Conforming loans up to $417,000 for a single family residence allows 100% cash out up to generally 80% of the value of the house. There are exception"s up to 90%.

Second homes are harder to pull cash out of and rentals (1 to 4 units) are the hardest properties from which to pull dollars.

If your house is on the market you cannot refinance the property. Some lenders will allow you to pull the house off the market and refinance immediately or within a short period of time. It isn't unusual to have the lender insist on a one year prepayment penalty on the new loan, although I know of a major bank which allows immediate refinancing without a prepayment penalty.

When it comes to stated income loans certain rules apply. If a couple applies for a stated income loan and both are working then the one with the lowest score rules, not the highest score. That is why many lenders suggest you quit claim off the lower score borrower if the stated income for the remaining borrower will carry the loan.

There are sub-prime lenders that will allow you to use the higher score, up to 100 points higher, for a cost of 1/2 point. It is an easy decision to make by comparing the results both ways versus the cost .

A non occupying co-borrower can not improve the credit score of the borrowers but can help with the income for qualifying. If you are going to do a stated loan then there isn't a need for a non-occupying co-borrower.

When qualifying for a loan with full income documentation becomes a problem because of excessive debt you are allowed to ignore all the payments on the debt you are paying off with a conforming loan (up to $417,000 for a single family residence and higher for a duplex, triplex and four-plex). Jumbo loans require you count the revolving debt payment even if it is being paid off, sub-prime loans do not count any of the payment on the debt that is being paid off even if it is a jumbo loan.

Lenders have different qualifications, as a rule, for different loans. If you are looking for a 30 year loan most lenders will allow 40% of your gross income to cover all of your monthly payments, including the property tax and insurance on your house. With better credit you can generally get to 50% of your gross income for quallifying and up to 55% on a sub-prime loan. Realize, of course, that sub-prime loans have higher rates and costs that covers the risk of higher qualifying ratios.

On shorter amortizing loans, generally 10 or 15 year fixes, some lenders will go as high as 70% of your gross income for qualifying. The reason is the risk is mitigated quickly because of the rapid reduction of the loan.

Some of the aforementioned rules may not make sense to you but it makes dollars and cents for the lenders. Lastly, all rules have exceptions and you might run into someone who has accomplished something I have mentioned can't be done. Exceptions happen, but not often enough to plan on them.