I had an excellent borrower, Steve, that was a pleasure to work with. He has a short term luxurious beach front investment property that was originally owned by his mother. It is held in her trust and he is having cash flow issues with the current mortgage.
The solution is to refinance the property out of the conventional investment loan, into a DSCR loan for the following reasons:
- The loan will not report on his credit, freeing up his debt-to-income
- He will access $100,000 in equity
- He will transfer it out of the living trust and into his LLC through closing
We originated the loan in July, 2023. To spoil everything we finally closed the transaction in December. We’ll get to that later.
Everything initially went right. The appraisal came in higher than expected. The LTV was very low, the rental estimates came in great. We don’t need the short term rental income.
Then slowly underwriting had an issue with the comps. The area was too rural. Then out lender’s in house counsel decided to deny the transfer of title from the living trust to the LLC.
Things like these were not too common in 2020. But we were in 2022, and lending guidelines have tightened up very quickly.
The main thing was the living trust.
NOTE: When a living trust is constructed, it has a standard clause that states the trust becomes “irrevocable” upon the death of the trustee. Irrevocable basically means you can’t make changes to the trust document i.e. no refinance.
The borrower had a bad taste in his mouth from the requirements from the lender based on this fact and he decided to pause the transaction. I believe he sought other opinions. His attorney probably has people to talk with specifically about this. I assumed he did his due diligence with another lender.
Six weeks later he calls me. He wants to restart the process. We collect the documents that expired from July and prepare to resubmit to underwriting.
New issues arise; late payments, FICO score drops, rental comps drop, and now we have a new set of challenges we are facing.
We have a lender we broker loans to that do not fit out lending guidelines. The rates are slightly worse, but for some the most important thing is to close the loan.
The benefits are incredible in comparison to a slightly higher rate.
Finally, the loan is submitted to the new lender in mid December. The file is underwritten while waiting for the appraisal to be completed. It is approved, the chain of title flows smoothly, and the borrower signs loan docs in December 27.
Steve, knew this property was going to be a tough property to close. He stuck with me as I was able to provide a solution where most others would not.
TL:DR
Borrower had a short term rental with title issues that closed in a DSCR loan.
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