Mortgage Guide

Unique Situations

Some home buyers fall into a gray area that will cause a lender to reject the loan, require additional information to approve it, or modify the terms. Many special circumstances are indeed circumstantial; perhaps you have been at your current job for less than a year, show a few late payments on your credit report or are self-employed.

Here are tips on dealing with the following special mortgage loan situations:

  • A problem appraisal
  • Buying a condominium or town house
  • "No-doc" or "low-doc" loans
  • Flawed credit

A problem appraisal

Sometimes the property is appraised for less than you have agreed to pay for it. This can create problems, especially if your down payment is small and the appraised value falls below the amount that you want to borrow.

If the appraisal falls short of the loan amount, you might have to come up with a larger down payment or renegotiate the sale price before the lender will lend you the money at all. Say, for example, you intend to borrow $97,000 to buy a $100,000 house. But the appraiser says the house is worth $95,000. The lender isn't going to give you a $97,000 loan for a house that's worth $95,000. Either you will have to negotiate a lower price for the house, or you will have to pay the original price but come up with a bigger down payment and borrow less than $95,000.

Buying a condominium or townhouse

When you buy a condominium or townhouse, as opposed to a single-family detached home, you generally receive exclusive ownership of the interior space of your unit and joint ownership of the common areas (walls, grounds, fences, facilities) with the other owners in the complex. In the case of a townhouse, you might also own a backyard and garage.

Your mortgage lender will want to investigate the complex from both a financial and physical standpoint to avoid making a loan on a troubled condominium. Most lenders have a questionnaire that the condo association can complete to help the lender analyze the project and decide whether it is acceptable collateral for a loan. The lender will pay particular attention to these details:

  • Percentage of owner-occupied vs. rented units. Most lenders want to see 60 percent or more of the complex owner-occupied.
  • Is the construction finished? Most lenders require that it be at least 90 percent complete.
  • Adequate insurance coverage, including hazard insurance.
  • Acceptable operating budget.
  • Competent management.
  • Adequate reserves to cover maintenance and major repairs, such as roofing or elevators.

Make sure you receive from the seller the condo documents, articles of incorporation and the bylaws of the homeowners' association. These should include notification of any ongoing litigation and special assessments. You may also want to ask for minutes of the homeowners' association meetings for the past year. Read the condo documentation carefully and make your approval a condition of the buy. Most states have enacted laws governing the sale of condominiums; check with your state's division of real estate.

No-doc or low-doc loans

No-documentation ("no-doc") or low-documentation ("lo-doc") loans are designed for entrepreneurs or the self-employed, recent immigrants, and borrowers who cannot (or choose not to) reveal information about their incomes. You can expect to pay a slightly higher interest rate for these loans, often as much as one-half percent.

To secure a no-doc loan, you will need to pay a substantial down payment of 20 percent to 35 percent, have excellent credit history and verifiable assets to cover closing costs. For a low-doc loan, you must be self-employed for at least two years and provide proof of sufficient assets and excellent credit.

Home buyers with the available cash can secure a no-doc or low-doc loan and then refinance their home later by switching to a lower-rate, full-documentation loan when their financial records better match the lender's requirements.

Low- and no-documentation loans are sometimes called "Alt-A" mortgages because they are alternative type of "A" mortgage -- that is, a mortgage for a borrower with good credit. In olden days, loans for people with flawed credit were called B, C or D loans, but now lenders use the catch-all term "subprime."

Flawed credit

You probably are aware of any serious problems in your credit history. But what if you are taken by surprise, and you have such flawed credit that your credit score is below 620? You can get a home loan, but it will be a subprime mortgage, with less favorable rate and terms.