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Real Estate Matters: Lenders cautious about a ‘cash out’ refinance

By Ilyce R. Glink and and Samuel J. Tamkin,

We sold our family farm. I took some money from my IRA, and with the proceeds from the first farm, we bought another farm.

Although I am 63 and do not have to pay a penalty for withdrawing funds from my IRA, my wife suggested that it would make more sense to get a small mortgage rather than paying the income tax on my IRA money.

I found out that I can return the funds to the IRA within 60 days without penalty and without owing any taxes. I am making arrangements to do that through a 3 percent flex-rate line of credit.

I tried to get a fixed-rate mortgage from my bank, but I was told that Freddie Mac and Fannie Mae will not allow them to make a mortgage loan to someone for six months when they pay cash for their house.

Is this really true? We are in a financial crisis, and while Fannie Mae and Freddie Mac do not need to lend money to people who can’t pay it back, it makes no sense to me that they will not lend money to someone who has paid cash for a house or farm and clearly can repay the loan.

Can you confirm that this is correct? It looks like a bureaucratic misunderstanding to me. There probably have not been many people that have done that in the past, but I suspect it will increase as more of us baby boomers retire.

You are getting correct information. The mortgage market doesn’t make a whole lot of sense, but all of the players have become extremely conservative. You shouldn’t have used your IRA money; it costs too much in taxes. If you can get a home-equity line of credit — and the question is if — then you should do that.

For a variety of reasons, the mortgage market has become quite a bit more complicated. When you buy a property for cash, lenders want to make sure that you have lived in the home for some time before giving you a loan.

Given the amount of fraud in the mortgage industry, lenders are more cautious than ever about doing a “cash out” refinance, where they give homeowners cash when they refinance their mortgage.

What you’re asking for, essentially, is a cash-out refinance. Your home is paid off, yet you now want a mortgage. The lender has to go through all of the steps to make sure you can afford the payment over the life of the loan. That means verifying your income and credit, savings and investments.

While it’s clear to you that you can afford to make your payments, today’s lending environment requires mortgage lenders to be very sure. The default answer is “no.”

In later conversations, you said you were able to use your home-equity line of credit to pay back your IRA and are now simply looking for permanent financing. You believe interest rates are going to rise in the near term and want to lock in a mortgage now, while rates are low.

Our best advice is to shop around until you find a lender who is willing to work with you. If you can’t get anyone to refinance your debt, then your Plan B should be to pay off your home-equity line of credit as quickly as possible, while the interest rate is still low.

I bought a house over a year ago with a balloon loan that comes due later this year. This was the only loan I could get because I had co-signed a loan for a friend and she missed some payments.

After I closed on my loan, my friend was laid off and stopped paying her mortgage. The loan went into foreclosure, but my friend and the bank came to some sort of agreement.

I am trying to refinance my loan, but no one will consider my application. Can you please tell me what route I can take? Is there a way to legally remove my name from her loan?

Unfortunately, you’ve put yourself in a really bad situation. When you decided to move forward and buy a new place for yourself, you knew you had trouble and decided to go forward anyway.

You were a kind and generous friend when you decided to co-sign your friend’s loan. But once you knew trouble was brewing with that friend, you should have known better than to take on a new loan without cleaning up the mess that your friend had created.

When you co-signed the loan, you and your friend were equally liable for the repayment of that debt. You should have known that if your friend failed to make a payment, your credit history and credit score would suffer. Furthermore, the bank is legally entitled to come after you for the money.

Once you knew that your friend had failed to make payments on her mortgage, another red flag should have gone up. At that point, you should have tried to see if you could help your friend catch up on her loan and then worked with her to see if that loan could be refinanced. You should have prepared yourself for the possibility that your friend could end up in financial trouble.

Right now, you have three big problems: First, your credit history now is worse than it was when you took out the loan. Second, your home might be worth less — perhaps a lot less — than when you bought it. And third, your balloon loan is coming due and you won’t be able to refinance it.

In the boom years of the real estate market, you could have sold the home and repaid the loan and had money left over. These days, it’s a lot tougher to sell homes because of all the foreclosures for sale. Depending where you live, if you were even able to sell your property, you might lose money on the sale and wind up owing the bank more cash.

We’re not sure what your best option is at the moment, but here are a few things that come to mind:

You might be able to find some lender who will work with you to refinance your loan. But since your credit history took a considerable hit once your friend’s home went into foreclosure, don’t be surprised if the lender offers you an interest rate and loan terms that are quite different from the rates you see advertised.

Another option is to sell your home and try to get as much out of it as possible. If the home’s value has dropped, you may have to try a short sale. (A short sale is when you sell the home for less than what is owed to the bank.) Your bank would have to agree to the short sale, and you might be on the hook for the difference.

And finally, if you can’t sell the home and can’t repay the loan, you may find yourself going down the path of not being able to make your mortgage payments and your home could end up in foreclosure.

Talk to a local mortgage lender to see if it might be willing to help you. You probably won’t find a big-box lender that can help, but some of the smaller, local lenders that often keep loans on their books may have a loan program for you.

You may want to talk to your current lender and see if the company is willing to give you an extension on the loan. Although it seems these days that many lenders do not make the rational decision in situations like yours, you could get lucky and your lender could decide that an extension of your loan is a better deal for it than having the loan go into foreclosure. (If the lender will extend your loan for another year or two, be sure to get the extension in writing.)

Finally, you may want to talk to a real estate attorney to discuss your options. Or you may want to talk to someone at a nonprofit consumer-credit counseling service.

In 2006, I built a $1 million home, paying $650,000 in cash. At the time, I was a top salesperson in my industry, earning hundreds of thousands of dollars each year. Starting in mid-2009, homes in my neighborhood started going into foreclosure or being sold as short sales. The $1 million to $3 million homes my neighbors owned started selling for $350,000 to $650,000, wiping out all my equity.

I had a 30-year fixed-rate m ortgage at around 6.75 percent. I decided to refinance into a new 30-year loan at 4.65 percent. After two months, the new lender told me that I couldn’t qualify for a refinance because I had previously refinanced my loan and new rules precluded me from an additional refinance.

I lost my great job and was unemployed for a while. I got another job selling, but I can’t really make the same kind of living as before. And I apparently don’t qualify for a loan modification because I either make too much or too little, depending on whom I speak with on a particular day.

My savings have dwindled from $100,000 to $5,000. I can’t get a loan modification. I’ve lost $650,000 in equity thanks to the foreclosures in my neighborhood and can’t refinance my property due to some obscure rule about how many times you can refinance your mortgage.

It seems to me that the big banks aren’t really helping anyone out. What are our real rights as homeowners and taxpayers?

We’re sorry to say that as a homeowner and taxpayer, your rights are quite limited. Despite the much-applauded governmental attempts to get banks to modify loans and help borrowers, the banks are not legally required by anyone or by any regulatory agency to help you. There are encouragements or inducements in place to give banks an incentive to work with their customers, but in many cases, those incentives are not enough to get the banks to help a borrower out.

You probably don’t qualify for a loan modification because you can still afford to pay your mortgage, even if the cash you have on hand is almost gone. If you can afford to make your payments, even if money is tight for a while, then you should do that and wait until the rest of the foreclosures in your neighborhood are sold and prices begin to rise or stabilize.

If you can’t afford to stay in the property, then you’re going to have to look at selling the home either for what you owe or in a short sale. You could also do a deed-in-lieu of foreclosure or a foreclosure to get out of the property.

We’re sorry that you are in this most difficult situation. If you believe that you were precluded from getting a loan modification, and that you meet all of the necessary qualifications, you can file a complaint with the Office of the Comptroller of the Currency at helpwithmybank.gov.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink’s Web sites, ThinkGlink.com and ExpertRealEstateTips.net.

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