Real Estate Weekly
July 30, 2003

Stock market losses, loan rejections, imperfect credit...What happens when your 'dream' client can't pay?

by Michael L. Moskowitz, CPA
President, Equity Now

It's a residential real estate broker's nightmare. You've invested months, or even a year, getting your client to agree on the home of their dreams -- a multi-million dollar condo on Manhattan's Upper East Side or a newly constructed home in Westchester. Your client has made a large down payment and gone out on a limb by promising in the contract to pay all cash or has waived the mortgage contingency. It is now three weeks before closing and you are exasperated. Your client lost a bundle in the stock market and does not have the money to close all cash after all. He stands to lose a large down payment and you stand to lose your commission. The bank with whom your client applied and which promised, "No problem," suddenly finds problems with the loan. They can't verify income. They found a missed mortgage payment somewhere in the borrower's recent history, or the loan amount is just too high.

Such scenarios occur much too often in the metropolitan area. Although we hear of banks anxious to lend at low rates in this market, that willingness is mostly restricted to a narrow group of "plain vanilla" borrowers, people with near-perfect credit scores, verifiably high income jobs, money in the bank, conventional loans and plenty of time to close the deal. When was the last time you had a client like that?

A real estate broker recently had a client purchasing a $590,000 new construction home in Westchester. The contract was signed a year ago and the builder could sell the house now for at least $750,000. To say the least, the builder was more than happy when it appeared the contract might fall through with the current buyer. The deal soured when the buyer's bank could not move fast enough to make the closing date. Large penalties per day were about to kick in and the seller pressed to break the contract so he could find new offers for the rapidly appreciating property.

Then the broker heard about Equity Now, a Manhattan-based direct lender which I founded in 1984. She learned that we specialize in complex situations such as buyers who are good risks but can't verify income and those who just need to close very fast.

One of our loan officers talked with the broker and with her client. We reviewed the client's application and agreed to lend him $470,000 at a good rate. The closing came off on time. The broker received her commission and had a very happy client.

In another case, a self-employed commercial real estate investor needed to borrow $2 million for a $2.7 million newly constructed Manhattan condo. He was self-employed and had lost lots of money in the stock market. Banks turned him down because they could not verify his income and because he scored below the 660 credit score needed for a jumbo loan. He even needed to borrow $350,000 for part of the down payment.

We reviewed his application and agreed to provide a business loan combined with a home equity loan on other properties for part of the down payment. We also provided the $2 million mortgage. We did not require income verification. The deal closed on time.

Equity Now was able to make these loans, where banks could not, because we are a direct lender. Direct lenders are distinguished from mainstream banks and mortgage brokers because of two prime characteristics. Some direct lenders lend for their own portfolio, as we do, which explains how they can make very difficult loans. Secondly direct lenders are experts in complex home buying situations banks don't like. This includes blemished or less than perfect credit and buyers who can't show 1099s or W-2s, self-employed buyers such as business owners with fluctuating income, and large cash out and jumbo loan situations.

Many borrowers are rejected or stonewalled by banks and other mainstream lenders who don't understand how to work with anyone but "plain vanilla" home buyers. Banks tend to focus on full income check loans and credit scoring, a problem for borrowers with cyclical ups and downs. And remember that many banks in today's market take up to six weeks to approve loans -- not good news if an early closing day is scheduled.

Some borrowers take what they think is the next best option and call a mortgage broker promising low rates and fast action. This may be dangerous. Brokers are middlemen who can't make lending decisions or lend money. They're agents trying to place your loan with a lender.

Real estate brokers often need to help their clients find the right lender quickly. The best way to do it is to make a list of banks, brokers, and direct lenders who might be of assistance. Check newspaper ads, get referrals from other brokers, or get referrals from clients who've had good experiences. Narrow the list down to people you feel comfortable in calling. Keep in mind that a good direct lender can probably close quicker than anyone else.

Be proactive in helping your buyer select the right lender. This way, you'll quickly get the commissions you've been working so hard for, instead of waiting forever or seeing the deal die. Your customer will be happy, too, as he or she starts enjoying the pleasures and financial benefits of home ownership.