This week's article is much like last week's,
to re-inforce the idea that not-so-normal deals do get approved from time
to time.
Our first story is a couple who own a small business. They need
to draw against the business or the residence in order to come up with
$16,000 for continued education, coupled with money to payoff credit cards
debt, totaling $50,000. They own a lovely house in a prestigious
neighborhood which is worth $450,000. The first mortgage against
it is $266,000. Their combined reported revenue for last year was
only $38,000, and their credit is only fair. Even the most lenient
bank will refuse them mortgage money because: a) not enough income; b)
not strong enough credit ratings; c) a second mortgage behind such a large
first mortgage ($260,000). They knew enough to start their shopping
through a mortgage broker.
The way our private Investors view the situation is a little bit different
than an institutional lender. If we add the required funds ($50,000)
to the existing first mortgage ($266,000), the total financing against
the property ($316,000) divided into the value of the property ($450,000)
represents a loan-to-value ratio of only 70% financing. If something
goes wrong, the second mortgagee can sell the property, payoff the first
mortgage and recover his/her money. The higher the first mortgage,
the lower the advance is typical, but below 75% financing is almost always
approved.
Our second story has to do with an elderly gentleman who owns his house
outright (no mortgage). When his wife of 30 years died in 1996, he
let all his bills accumulate. He no longer had the will to preserve
his credit rating. Last year, he met another lady who rekindled his
focus. He now realizes that his creditors can force him to sell his
house in order to be paid, if he does not clean things up. He has
tried unsuccessfully to payoff bills with his pension income. Now
fearing the repercussion of almost two years of neglect, he presents himself
to his bank for help. The loans officer welcomes him into the office, conducts
a normal interview, runs a credit check and advises him within the hour
that the needed help will not be forthcoming from the bank.. He tried several
other lending institutions who gave him the same answer. He cannot
understand the problem! If his house is worth $130,000 and he requires
only $45,000, the banks should be able to do the deal. The answer
lies in the type of institution he is approaching, and his awful credit
rating. The loan to value ratio is good but banking institutions
in this country have learned that giving great rates to previous poor credit
risks normally exposes the bank to undue labour of collecting the account.
On applying with us, we approved him in twenty minutes through a lender
that charges for the probable collection activity. This equity lender's
rate (8%) and fee for their trouble ($1,000) is reason enough to lend the
money. If something goes wrong, this lender will immediately sell
the property to recover their money. For our elderly pensioner, this
last chance to a new life is welcome news. He does not have to sell
his unit, and his pension will easily make the monthly payment to the mortgage
company.
Our nest episode is a housewife who babysits for a living. When
her husband left her 10 years ago with 2 small children and no support,
she turned to babysitting as a way of earning income, and to keep close
to her own kids. Her lawyer at the time was able to negotiate the
home in the settlement. It had a small mortgage which she has since
liquidated. She now wants to do some upgrading of the unit, some
necessary repairs and take her first holiday in ten years. Her income
tax returns, through her accounting firm, shows a gross income from babysitting
at $31200 per year ($120/wk X 5 kids). The accountants are able to
deduct a part of her property taxes, part of her heat, her light, her food,
her car, her insurance, her day trips etc. The net result is a taxable
income of only $8000 per year. Her banker tells her that she cannot
afford a loan, no matter if the unit is worth $95,000. This is another
case of mainstream lending not wanting a client that shows little or no
income. As in the case above, we were able to get her financed because
of the equity. The cost was higher, but for her the need was present
and the approval was welcomed.
You have no doubt noticed that in the majority of these cases, equity
(value) or cash does indeed play a vital role in the approval system of
these not-so-normal deals. The property becomes the negotiating factor
with these equity lenders. Provided the property is in good shape,
and the loan-to-value ratio is low enough, just about any deal can get
approved, regardless of income, or credit. You should also know that
the fees and rates will always be higher than mainstream lending.