Trying to get a Refi loan! Help!

[jess]

Ok. So I bought my house almost 3 years ago in a homeowner-financing situation. Monthly mortgage payment with a balloon payment in 3 years. We have the title, we have homestead exemption. We renovated the house. House now worth 2x what we bought it for. New AC, new hardwood floors, bath and kitchen redone, etc. A vibrant neighborhood, walkable to park, grocery store. A great little neighborhood for our little family of 4. 2BR/1BA. Potential rental home in the future. We made our mortgage payment on time every month, but our balloon payment is coming up.

PROBLEM: In between the time we bought the house and now, I had baby and some medical problems which did a number on my credit. A hospital filed a lawsuit against me for a $700 remaining balance. I paid them in full and never went to court, but it still shows up on my credit report. Now the bank will not give me a loan to refinance. I am looking at other options.

My partner's credit is fine, but is self-employed. (The pay period that the lender is looking at, he had taken off a week or so of work to put up a fence, do some landscaping and some home repairs and so income is lower than normal for that time.) So without including my income, he doesn't make enough money to qualify (although I think really he does).

We do not have very much monthly debt. Car payment of $240, which will be paid off in a year, student loan payment of $50/ month.

We need a loan for $42,000. I have thought about the online lenders, but not sure how legit they are. Also curious about how long the process takes.

Any ideas?

[Another Reader]

What does the lender you are working with suggest? 

It looks like three options to me.

1.  Negotiate an extension from the seller.

2.  Negotiate with the hospital to get the ding off your credit report.  Get the lender to rescore.  Could take 60 to 90 days, if the hospital agrees.

3.  Sell the property before the loan is due.

The seller may be thinking they are getting the property back.  Don't let that happen.  Get it on the market if there is no alternative so you reap the rewards of your work.

[CorpRaider]

One potential option might be taking a loan or even a distribution (if no other option) from your 401(k) or retirement plan.

[brewer12345]

I would contact a local bank or credit union that will make loans that will NOT be resold to Fannie or Freddie.  You could expect to pay more in fees/rate and will noyt get a 15 or 30 year fixed loan, but there are probably local (smaller) lenders that will do it.  For the purposes of avoiding a LOT of headaches related to regulatory compliance, the kind of loan you probably want is a home equity loan or line of credit.  Particularly if you have a lot of equity in the house, you should be able to get it done.  You could try someone like www.penfed.org, who tend to hold home equity loans on their balance sheet and can be pretty open minded if we are talking about a sub 50% LTV.

[Another Reader]

There are two problems here.  First, at $42,000, very few lenders will want to do the loan.  It's too small to be profitable.  Second, the person with the verifiable income has a serious ding on her credit.  It's possible a portfolio lender would evaluate the self employed person's income with more flexibility.  It's certainly worth a try.  However, if you cannot find financing, you want to avoid giving your equity to the seller.

[brewer12345]

Another thought: can you get enough of a low rate crdit card cash advance together as a bridge loan?  Obviously this would not be a long term solution.

[jess]

@brewer12345: to buy another month of time?

[Another Reader]

It sounds like you need help to avoid losing your equity.

1.  How bad is the credit score and what did the lender suggest to remediate it?  Would your self-employed SO qualify in a month or two?  Have you talked to any other lenders?

2.  Do you have any other credit or savings resources available that would equal the loan amount, as some have suggested using?

3.  How long do you have until you are in default because you have not paid the balloon payment?

3.  Does the seller know the situation?

[jess]

@Another Reader: They pulled all 3 scores of mine, middle score was 14 points shy. The lender seems... distracted. She did not recommend anything to remedy. When I asked her what I could do, she said, "I don't know."

I think my SO should qualify now, a little bit confused as to why he didn't. She said his score was good. Debt income ratio was the issue. I think taking some time off last month is the problem. Made that month's income lower than usual. So yes, I think he should qualify next month.

We have 18% of the loan amount in savings that we could use. If we used that money, then we would need to still borrow/beg/steal about $35,000.

Not sure how long I have before the loan defaults.

Seller does not yet know (I think). My Real Estate agent is also a long-time friend and is communicating with the seller's lawyer on our behalf.

I think I am going to go to my local Credit Union tomorrow and see if they can work anything out with me.

Can I get another kind of loan to pay it off? Would that even be helpful?

[Sweet Betsy]

Call more lenders....they all do things differently and have different requirements.  Many credit unions offer 5 and 10 year mortgages that they service in house. 

[brewer12345]

jess, your lender doesn't much care because your small loan balance isn't likely to be profitable.  You need to get out there and shop around ASAP.  What you need is financing ASAP, and frankly it does not matter whether it is a mortgage, home equity loan, credit card advance, signature loan, etc.  Once you have time on your side by raising the cash you need for a year, you can go find a lender at a more leisurely pace that offers what you want.  But get moving quickly.  Talk to afew credit unions.  I  think your best bet is to structure this as a home equity loan or line of credit.  Small balance home equity loans and lines of credit are very likely to be held on the lender's balance sheet rather than sold off to Fannie or Freddie, so lenders can underwrite the loans as they see fit.  That is your best bet.

What would your LTV be with a $42k mortgage?

[Another Reader]

The picture is a little clearer, but I might be asking the question incorrectly.  You have a contract with the seller that calls for a balloon payment at the end of the three years.  The contract should state what the seller's remedy is if the payment is not made when due.  If it does not, there will be something in your state's real estate contract law that says what the seller can do.

If the payment is not made when due, there is a process by which the seller can foreclose on you and get the property back.  How quickly the seller can act and your rights to cure the default (default = not paying the balloon payment when due) will depend on the contract and the state.  This is why it is important to know when the balloon payment is due.

If you are past the due date for the balloon, you have a problem that needs to be solved immediately.  As in "your hair is on fire" immediately.  A lot depends on the seller and his/her motivation.  If the seller is willing to extend the loan a few months while you get this straightened out, that's usually the easiest way to deal with the issue.  If the seller is not willing, you may have to act quickly to avoid foreclosure.

You may need an attorney to navigate through the process, because the seller has one.  Advice from folks on an internet forum is no substitute.  You certainly need to talk to your credit union.  Finding someone who will get the loan done quickly would be my top priority in this situation.

[jess]

Another Reader: sorry, the balloon is due in one month. Not sure what the seller's course of action is after that point if he does not have his payment. I need to peruse my paperwork again.

[jess]

Brewer: how exactly is LTV calculated? The house is probably worth more than double what we bought it for.

[brewer12345]

LTV is just the amount of the loan divided by the value of the property.  If you are under 50% LTV there are lenders out there that will do a home equity loan or line of credit without a lot of fuss because they are so well secured.

[Catbert]

Do you have money in an IRA, 401 or other retirement account?  You can borrow up to half of your 401k (up to 50K) and pay back over 5 years.  You could take a distribution from your IRA with no tax or penalties owed if you can replace within 60 days.  That at least would buy you a bit of time.

[Another Reader]

It sounds like the loan to value ratio is low, but that's not the problem here.  The income and the credit are making the loan difficult.  A HELOC will be just as difficult.

In your shoes, I would talk to every local lender to see if there is a way to get this done and get it done quickly.  Worst case, you may have to seek out private lenders, who will charge high interest and up front fees.  You could also approach the seller for a short extension if the loan is in process but will close after the balloon due date.  I would start tomorrow morning, given the urgency.

[Frugal_in_DC]

Last year when we refinanced we went with one of the network lenders we found on the Mortgage Professor website, mtgprofessor.com . We got a competitive rate with no closing costs. Our former lender and local credit unions couldn't compete. We were able to start the refi process right away and everything went really smoothly. No problems with the new lender either. Good luck!

[jess]

OP here. Just wanted to update that we DID get the refi and all is well. We ended up paying off most of our car loan (~$1600) and that made our Debt-to-Income ratio favorable enough to loan to us. Hooray!

In other good news, my husband got a new job which gives us a little more wiggle room. :)

[Ellen]

I love a good news update. Congratulations on the house and the job.