He’d racked up about 65K in debts outside of the home over the last couple of years. Several of his creditors were threatening to sue and had begun to place liens on his home. He made great money, but his income was 100% commission and he only had 18 months on the job. Even with his high income, the interest was piling up and he was only able to make minimum payments on all of the bills. His credit score had fallen into the low 600’s and he was facing the possibility of having to file a bankruptcy for the second time. Further, he had disputes on his credit report that needed to be resolved before submitting his loan to the lender. He was at risk of losing his home and over 120K in equity if he couldn’t find a solution fast.
We always try to be as thorough as possible on the front end. We know how lenders think and we want to make sure that we address any concerns a lender might have at the outset. After pulling credit we began the vetting process. Our plan was to refinance using an FHA product because it’s easier to qualify with a lower credit score. It’s not an ideal long-term solution but is the best option for this situation. We found 3 lenders that were willing to do the loan and landed on the one with the best rates and lowest costs. This lender was willing to accept 18 months commission-able income and the lower credit score. They would require that all the debts were to be paid off as a part of the refinance rather than at the client’s discretion.
We advised the client to remove the disputes from the credit score and informed him of the loan process. We also informed our borrower of all the documentation that would be required and insisted that we have the documentation BEFORE we would issue the approval so as to not waste any time or set unrealistic expectations. Further, we outlined a plan to do a refinance into a shorter-term conventional loan in ~6 months after the debts were cleared and the credit score improved. This conventional refi would keep his mortgage payment about the same is it is today, but shave 7-10 years off of his loan.
Regretfully for our client, his current lender told him that the refinance would be much easier. They weren’t concerned about income and told the client that he didn’t need to resolve the disputes. They issued a loan estimate that was very appealing to the client without verifying his employment or credit. It was at this point that my old colleague decided to move forward with his current mortgage company. Who could blame him? His current lender offered a simple solution and the path of least resistance. We warned him that it was unlikely to be as easy as he’d been led to believe; but assured him that we would still be willing to help should anything change.
Unfortunately, the current lender’s lack of foresight cost the client quite a bit of time. Nearly 4 weeks later they informed the client that they would be unable to do the loan because of the low credit score and lack of time at his current job. They also told him that the denial was due to a federal regulation and that NOBODY would be able to do this loan until he had 2 years with his current employer.
At this point the entrepreneur texted us back to see what we thought. We referred him to the original plan and assured him that we had a lender who would do the loan if he was willing to do the work on the front end. The process was not as easy as the borrower would have liked, but we were ultimately able to get the loan approved.
We closed the loan 30 days later. Things actually went better than planned. We reduced the client’s expenses by more than $1,000/month. Even better was the fact that his savvy spouse was able to negotiate an additional 20K off of those debts because of their ability to settle using the loan. After 6 months, the credit score improved enough to refinance into a conventional loan. His current mortgage payment is less than when he initially called me and his current payoff will happen 7 years earlier (and 85K less in total costs) than if he’d never done either refinance at all.
The moral of the story is that many people in the lending industry are happy to tell you what you want to hear and literally hope for the best. In this case, that approach only cost our client a little time and some frustration. It’s not hard to imagine a scenario where things could have gone much worse for our client. Personal finances can be complicated and often require thoughtful solutions; we want to think outside the box and make recommendations that will benefit our clients today AND in the future. Our approach will always be to put our clients best interest above our commissions and to always tell the truth.
We are educators, not salesmen. We have a plan to get you on the path to financial freedom, and that starts with us learning your unique situation.