Pushing the envelopeJoe CornoFederal Housing Administration, HUD, downpayment grants
When you hear motorcycle racers talk about their consistency in
winning, they talk about pushing the envelope. When athletes talk
of personal performance, they say something about pushing the
envelope. What does "pushing the envelope" mean?
In the auto supply and service parts industry, the boss may say:
"Take the company car, get there, pick up the parts and get back!"
The courier drives as fast as he can, without causing an accident
or receiving a citation, and gets the parts back quickly. You see,
if he wrecks or receives a ticket, it is cause for dismissal.
However, if the company receives calls that one of the company
vehicles was seen driving fast, the manager explains that the
vehicle is out on loan to a customer.
The wreck or ticket is "breaking out" of the envelope. The calls
(due to aggressive driving) are right at the crease or edge of the
envelope, and the boss knows that the courier is following his
instructions. In motorcycle and car racing, the fastest, consistent
speed, without incident, is the envelope's crease or edge. A crash
costs money, loses sponsors and possibly injures the driver.
Before I receive e-mails stating that I am promoting risky
behavior, let me express that none of you want your pizza delivered
cold or late. You do not want your dairy products warm or melted. I
am stating reality in the supply and service industries. I could
include restaurants, legal and tax services, and movie theaters.
Heaven forbid if your movie started two minutes late!
The loan industry is challenging originators to push the
envelope in service, as well. Originators have to follow
instructions and comply with stricter guidelines, yet get loans
packaged and funded. In the past, some originators broke out of the
envelope and did something fraudulent. So how can an originator
stay on the edge and remain true to laws and guidelines? They need
to learn where the edge is.
Let me give an example of earnest money downpayment, in regards
to the envelope's edge, so that you can understand how pushing the
envelope works in our industry. I will use Federal Housing Administration (FHA)
and U.S. Department of Housing and
Urban Development (HUD) loans for the example in that, on
Wednesday, Oct. 1, 2008, downpayment grants are not allowed. What
is an originator to do?
First, obviously, start training your clients to save. This is
the reason the downpayment is "earnest money." Lenders want to see
borrowers' own funds in the deal for the home and the loan. It
would be wonderful if all of your clients had savings to use as
downpayment. What if they don't?
You can have a relative co-mortgage or co-sign who will utilize
their funds for the downpayment. HUD treats borrower funds as all
borrower funds, and one borrower can make the downpayment and the
other borrower make the payments. The income and "earnest money" is
legally co-mingled in an FHA transaction and is underwritten as
"borrower's income and savings" all together.
If mom or dad does not wish to co-mortgage with the kids, they
can add the kids' names to their bank accounts. After 90 days, the
account statements provide a "history of the borrower's ability to
save." A Verification of Deposit (VOD) would show that the kids
have a recorded history of savings after the account (with their
names added) matured for 90 days, even if the kids did not place
any money into the shared accounts.
There is not yet a requirement to track the deposits to see
which person on the accounts placed the money in the accounts. This
is "pushing the envelope," while complying and remaining within
laws and guidelines. If you reproduce bank statements, adding the
kids' names yourself, you have just broken out of the envelope and
created fraudulent data. Adding the names through the institutions,
and allowing them to season for 90 days, is legal.
The same holds true for gifts or gifted funds. As of yet, there
is no tracking of the donor's funds to verify the source where they
raised the funds to donate (in FHA), but only to track the funds
donated into the borrower's accounts. If the donors would place the
funds into the borrower's accounts, then it is no longer considered
gift funds and can be verified as the borrower's earnest money, as
long as the funds seasoned for 90 days.
The borrowers would be underwritten with savings in their
accounts. The borrowers would have a past and current bank
statement, besides a VOD, showing the history of the funds as
savings. There is no donor letter and no deposit slip of funds into
the borrowers account. This is pushing the envelope and works
within all laws and guidelines for FHA loans.
Now, there are those in the industry that would never use
downpayment assistance grants previously when they were allowed.
All I can say is that you missed out on placing many good people
into affordable homes. I am sure that some readers will find this
article a bit too edgy.
I am illustrating how to get loans through underwriting and
funded that fully comply with all laws and guidelines. Please
remember that my first suggestion is to train future potential
borrowers to save. Training people for homeownership should be your
objective and goal.
If you do not like the 90-day seasoning or if guidelines should
change, you can have the joint savings or deposited gifted funds
season for four, five or nine months. What is being demonstrated is
to refrain from breaking through the envelope—push to the
edge, and back-off a little.
Just as borrower training is needed, you need to seek training
so that you can distinguish the envelope's edge. I suggest that you
utilize the various lender guidelines for such training. Reviewing
lender requirements (knowing that seasoned savings is funds
verified for 90 days) can benefit borrowers in making their loan
package stronger in underwriting.
If a guideline defines what seasoned funds are, you are simply
complying with the guideline with seasoned funds in borrowers'
accounts. This is what my example portrays in the FHA/HUD scenario.
There are various state-by-state loan programs that you can
research and learn.
Local banks and small lending institutions have specific rules
and guidelines that can be obtained, learned and utilized to
benefit a borrower. That is part of the function for having
guidelines. I have had two FHA loans in my lifetime, personally. In
one, I utilized a downpayment assistance grant.
We also need to engrain commitment to remedy the debt. We need
to train the borrower to eventually pay his loan off. Some have
pushed the envelope in having borrowers bank on their equity
increasing. There is nothing illegal on such concepts. However, it
has proven to be unsound advice, and this is where most defaults
and foreclosures come from.
Utilizing guidelines for the benefit of the borrower is noble
and is needed in these times. There are many ways to push the
envelope, and I hope that I struck an interest so that you can be
the best at what you do.
Joe Corno is president of Utah-based We Be Consulting and
Seminars. He may be reached at (801) 836-2077 or e-mail [email protected]