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Forward on reverse: Retirement finance in the age of HECM: Pick "reverse" brain cells

Apr 15, 2008

The unbelievable FHA loanJeff Mifsud Federal Housing Administration, adjustable-rate mortgage, credit That's right; I said unbelievable! Read on, and be inspired by a real-life example of just how powerful the Federal Housing Administration (FHA) loan can be. More specifically, learn about the effect it can have on people's lives. Many loan officers and loan processors are unaware of the magnitude at which the FHA can impact potential homeowners. The personal goals of your clients will vary, of course. Some want to own a home, others wish to exit a dangerous neighborhood and still others need to refinance an adjustable-rate mortgage. As you become more knowledgeable about FHA guides, you will begin to take on the more challenging credit profiles and convert them into closed loans. In my Webinars, I teach loan officers my loan packaging protocol and give them the insider's view of how to put these loans together. Knowing how to properly package the loan is perhaps the single most important skill required to be a successful FHA originator. In these articles for The Mortgage Press, I will continue to share with you some of the same tips I teach to loan officers all over the country. One thing you have to know is that FHA loans are "story loans." The better you are at telling the client's story, the more you will meet with success in underwriting. Many loan officers turn away FHA loans because they are "harder" to do. To this response, I ask, "If you could deliver a good loan and earn an extra $1,500 at the same time, would you work an extra week processing that loan?" Do this 10 times a year and you will have increased your income by $15,000. Many loan officers re-think their position when they look at it that way! Allow me to share with you one of the more memorable FHA experiences to give you an idea of the importance of asking the right questions during your interview with the borrower. I hope this will broaden your view of the loan and encourage you to accept the cases that, at first glance, may appear more challenging. Interview properly and close more loans! A real-life loan scenario About 18 months ago, a former client contacted me about refinancing his mortgage. He needed to consolidate some debt that his girlfriend had, unbeknownst to him, accrued over the years. He and his girlfriend bought the home together, but were now ending the relationship. Hence, another goal was to do the refinance in his name only. His creditor payment history was perfect, except for one 30-day late payment on his mortgage and a late credit-card payment. He had been denied acceptable loan terms by two other companies because his credit score was below 580. When I asked him why he didn't call us first, he told me that he was embarrassed because of the mess he was in and had felt compelled by some direct mail solicitations these other companies had sent him. I asked him numerous questions to gain a clear understanding of his situation. I felt we had the makings of a perfect FHA loan. Due to the scores and credit profile, the other two companies didn't even see FHA as an option, or, more likely, didn't have knowledge of putting FHA loans together. In the loan packaging protocol that I teach, I stress the importance of reviewing every item on the credit report and getting clear answers about each item. In this case, when I asked him about the one 30-day late payment on his mortgage, he was embarrassed, as he took paying his bills on time seriously. I asked him, "Did you really make this payment 30 days after the due date?" A quizzical look came over his face as he tried to answer the question. It seemed obvious that the other companies hadn't asked him this question, and frankly, he hadn't even questioned it himself. After thinking about it, while he remembered paying late, he did not believe that it was past 30 days late. As the interview progressed, I learned that he had been a teacher for more than 18 years. He had a great skill in inspiring his students to achieve their potential and shared many examples of this with me. Most impressively, on a teacher's salary, he had been able to save over $80,000 in his retirement fund. The home he lived in was spectacular—again, not what you'd expect on a teacher's salary. As I admired and asked him more about his home, I came to find out that he had purchased it about 14 years earlier. He told me about all the work he had personally done on the home and how much the home meant to him. He expressed how difficult the break-up had been for him and how he just wanted to get on with his life and start fresh. Based on the loan, which needed to cover the debt consolidation and total settlement charges, the loan-to-value (LTV) would be at 78 percent. Follow me through this loan scenario, and note that in addition to using the interview as a rapport-building tool, I was gathering information to include in the Letter of Explanation. This letter can make the difference between a loan's approval or denial, depending on how well its written and how well it is supported by documentation. Back to the story (I did tell you that most FHA loans are "story loans," right?): Our initial interview was after business hours, so I told him to get on the phone with his current lender first thing in the morning and find out the facts about the alleged late payment. Sure enough, the next day he called me to say that in fact his payment was late by just under 30 days, but that there had been a bank processing error with the automatic withdrawal payment that caused a 30-day late payment to appear on his credit report! I instructed him to call the bank and get that information in writing, which he did. What an amazing discovery! Even with a 30-day late payment, I believed we had a shot at approval, but this made the chances even better, despite the late credit card payment. The highlights of this loan were as follows: low LTV, great reserves, good ratios after paying off debt and a letter proving the mortgage payment wasn't 30 days late. We had all the elements of an effective letter. Here were the letter's pertinent points: an explanation for the late credit-card payment (a one-time oversight due to the ending of his relationship), debt accrued by his ex-girlfriend (behind his back, which broke the trust, ultimately leading to the break-up), the 30-day late payment being inaccurate (and due to a bank error), his long-time employment at the same job, his passion for teaching and his ability to inspire children, the personal connection to his home, and all the work he had personally put into it. By combining all the different facets of his credit profile and personal struggles, the loan was approved, and he was able to achieve his goals of the refinance. And are you ready for the icing on the cake? Because of the size of the loan, asking the right questions resulted in gross revenue of over $10,000 on the loan! How's that for a happy ending? Eliciting this type of information from a borrower is crucial. You need to give the underwriter something to base his decision on. You've got to think outside the box when reviewing borrower profiles that, on the surface, appear as though they will surely be denied. One thing loan officers throughout the country tell me after taking my training is how many tens of thousands of dollars they have thrown away over the years because they never learned how to do FHA loans! The time to get in the game is now! Go FHA! Jeff Mifsud founded Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a faculty member of LoanToolbox and is a former FHA underwriter. He may be reached at (877) 342-9100 or e-mail [email protected]. For the benefit of the loan officer/loan processor community, he has set up a national FHA message board. For more information, visit
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