The conventional (FNMA/FHLMC) cash out delayed financing exception program seems to carry a lot of misinformation with the program. I think the reason behind this top mistake this is not a widely used program. Unless you work at a lender where the sales staff has a good clientele of rehabbers or investment property purchasers, you may not see this program.
Before we review the top mistake I have found in underwriting, let us review the basics of the cash out refinance delayed financing exception.
What is Cash Out Delayed Financing?
When a borrower requests a cash-out refinance they must be on the title a minimum of six months from the date of purchase to the date of closing. If they have not been on title for 6 months if they qualify they can use the delayed financing exception listed in the guidelines. For all cash-out delayed financing transactions, the underwriter must complete the following steps
- Confirm the borrower has no mortgage liens on the property by reviewing title
- Confirm all the sources of the funds used to purchase the subject property
(These funds can be cash on hand, personal loans, or secured loans (on other real estate or tangible property))
- Follow all standard rules for cash-out refinances listed in FNMA B2-1.2-03 and FHLMC 4301.5
The #1 Mistake:
The underwriter sets up the transaction using an LTV that is based on the original purchase price of the property.
This method is not used for this loan type, instead, you have to do some research and comparisons to determine the maximum LTV.
The LTV is always based on the lessor of the current confirmed and accepted appraised value OR the confirmed amount of funds contributed by the borrower to close the original transaction.
For example, if the borrower purchased the subject property for $70,000 and completed $20,000 in renovations after purchase. The appraiser puts the fair market value at $120,000 and does a great job explaining the increase in value since the last purchase. During the underwriting review, it is confirmed the borrower needed $75,000 to close the original transaction. The borrower contributed $50,000 from their savings account and received a gift from his/her brother of $25,000 to complete the purchase of the transaction.
Let’s work on the math in this scenario…
Here is how the underwriter should determine the LTV based on that example scenario
$120,000 Appraised Value
x 80% Example max LTV on a SFR primary residence
$96,000 LTV Max
Compared to the amount contributed by the borrower
$70,000 purchase price of the subject
$5,000 closing costs and pre-paids to close subject
$75,000 Total to close the loan
$75,000 Total to close loan (as noted above)
$50,000 Confirmed from the borrowers own funds
$25,000 Confirmed as a gift to the borrower
Since the borrower’s confirmed funds are $50,000, we use that in our calculations.
Note that the $25,000 gift cannot be factored in this calculation.
$50,000 is maximum loan amount for the transaction OR LTV of 41.66% since $50,000 is the lessor of $96,000 and $50,000
As you can see meeting the LTV is not just one simple math formula, it requires research and comparing the two numbers to get the right answer. This training is another example of the practical training you can receive by joining the UberWriter 10 Point Underwriting Process certification program launching in 2018. We have taken the process of underwriting a file and not only provide the knowledge for topics like this, but the step by step method to effectively underwire any loan.
That is all for today, our team at UberWriter wishes you a safe and happy Thanksgiving Holiday! Go enjoy time with the family!