Bank statement program allows refi for self-employed client

Mortgage advisor:

John Holmgren, Finance of America Mortgage.

Property type:

Single-family residence in Oakland.

$1.597 million.

Property value: Loan amount: Loan type:

$840,000 30-year fixed interest-only.

3.25% with no closing

Rate:

costs.

Backstory:

My client, a selfemployed structural engineer, had been turned down for a refinance by his current lender, to whom he had made timely payments for four years.

His objective was simply to lower his rate/payment. The rationale for the loan decline was that his income had declined more than 20% between tax year 2019 and 2020, even though his lower 2020 income was sufficient for qualification.

The implicit assumption in an underwriting policy of this nature is that income is on a downward trajectory such that 2021 income would therefore be even lower and not sufficient to maintain timely loan payments.

It was unsettling that a lender with whom he had a good track record and that, presumably, was aware that a pandemic had happened in 2020, would not make a greater effort to fully understand the client’s situation.

Recognizing that many lenders have similar policies on income decline, I was able to use one of our portfolio programs to get the client into another interest-only loan product that is fixed for 30 years, with interest-only payments allowed in the first 10 years of the loan term.

While interest-only products got a bad name during the “mortgage meltdown” in 2005, the reality is that for self-employed persons with a lot of home equity an interestonly loan provides cash flow flexibility that can be very desirable.

In this case the client provided 12 months of business bank statements to demonstrate strong cash flow. These statements were used to calculate qualifying income.

The client elected to go with a “no closing cost” loan in which closing costs are waived in exchange for a somewhat higher interest rate, hence he did not need to increase the amount borrowed at all to cover the normal closing costs.