based to asset-based. Common sources are liquid
assets, investment accounts, retirement savings, and
equity in real estate. Refinancing to convert equity into
spendable funds is not high risk, as long as a respectable equity position remains. Investment properties
being refinanced or purchased preferably should have
at least a break-even cash flow, taking depreciation
into account. On a primary residence, a reverse mortgage is an alternative.
Cash-out after an all-cash purchase: This is the most
benign of all cash-out transactions, assuming LTV is
based on purchase price or verified improvements
since purchase. Also called delayed financing or asset recapture, under certain circumstances it may be
investor acceptable as a rate and term refinance. The
often overlooked strength is that an all-cash purchase
requires strong savings--unless funds to purchase were
borrowed--which translates to strong reserves after
the refinance transaction. Funds borrowed from close
relatives who are willing to share their wealth on a
temporary basis should be considered a minor but
positive compensating factor. Depending on the investor, pricing may be equivalent to a purchase or rate
and term refinance.
Although this section demonstrates the spectrum
of cash-out risk, the contributory factor of LTV cannot be ignored. If timely repayment is a concern, the
solution is a lower loan amount or no refinance at all.
Larcenous borrowers compose persuasive motivation
letters. With a cluster of cash-out requests for medical
emergencies, or a borrower with recurring cash-out
refinances not supported by improvements cited in
the appraisal, beware.
Anne Elliott studied mortgage risk throughout her
professional career. Her upcoming book, Underwriting
with Thought, or An Alternative Approach to Responsible
Origination, will be published in early 2017.
Contact her at firstname.lastname@example.org
improving their home, just not the one they're living
in now. This is not a half-truth but misrepresentation of occupancy. One method to elicit the truth is
to condition for specific improvements being made.
If proceeds are substantial, there should be a signed
contract or copies of bids. These details in conjunction with interior pictures also can shed light. A motivation letter for cash-out on a tiny one bedroom
condo citied plans for a kitchen and balcony remodel.
Reviewing photos of an already upgraded kitchen and
a crib in the condo's entry hall prompted skepticism.
Updated inquiries if the credit report is stale can be
helpful too. Insistence on a specific closing date is another tip-off that the borrower is moving out.
Cash-out for home improvement, in the coached sense:
Cash-out for home improvements is a default answer
for loan officers who do not consult with the borrower, believing this response creates the best impression.
Cash-out to sustain lifestyle: After retiring, borrowers
with the foresight to save transition from income-
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