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].