CASE STUDY - Using Seller Credit to Pay Buyer Debt
This past week we had a VA buyer who was turned down by multiple other lenders. They were in contract with a relatively good purchase price, and their Debt to Income ratio was high due to some consumer debt with high payments and an auto loan. IDENTIFYING THE PROBLEM Debt to income is almost always the culprit with clients who do not qualify. Issues can almost always be solved using an increase in income, a decrease in debt, or a combination of both. To solve the problem is simple - identify the shortfall, and fill in the gap. In this particular case, the client wanted to buy a home, and when the payment was calculated, in addition to the car payment and consumer debt payments, his debt to income ratio was 71%. This was causing the issue. Because most lenders stop here - he was stuck and we were his last option. First, we identified the ACTUAL shortfall that was causing the problem. To do so, we figured out that he would qualify for a VA loan if we could get him below 60% DTI. Once that is established, it's pretty simple to figure out a) How much income we would need to increase by, or b) How much debt we would have to pay. There was no realistic way to increase income. We only had one borrower, and VA does not allow for non-occupant co-borrowers, there was no spouse to go on the loan, etc. So, the only option was to reduce debt. We looked at the credit report and identified the one option. His car had a relatively low balance (8,000 dollars) in relation to his payment (450 dollars). We knew if we could pay off the car, it would decrease his debt, which would increase his bandwidth for his mortgage payment. This is an important concept because sometimes you can have two credit cards with similar balances, but one minimum payment is much higher than the other - and that definitely plays into our planning process. BUT - he still did not have the cash on hand to pay off the car. THE SOLUTION The solution ended up being in a relatively little known concept about the VA loan. VA allows seller credit to be used to pay off consumer debt. In this case the property was in escrow for a while, and an appraisal was not done, and the market had actually gone up quite a bit prior to our meeting the client. I asked the Realtor if they thought there was room to increase the sales price, and the Realtor said that they had a recent sale that they felt would support a higher price. So, we amended the contract and INCREASED the price AND seller credit by 8,000 dollars - and in our file showed the car paid off using excess seller credit to do so. The buyers debt to income dropped to 56%, and we were able to get the loan approved easily. The car will be paid off through escrow, and the client will not only have a new home, but more cashflow each month to be able to afford the payments. This is just one example of how understanding not just how to qualify a buyer, but solve problems leads to more converted sales and happy clients. Keep this VA tactic in mind when you've got excess seller credit. If you have a VA buyer who has a 10,000 dollar credit, and 8,000 dollars in fees - in lieu of giving the 2,000 dollar excess back to the seller, have them provide their credit card statement, or any other debt statement to escrow, and ask them to make a 2,000 dollar payment towards debt. It's a win-win, even if it isn't required to pay debt to qualify. If you have any scenarios that we can help with, or if you need a great lending team on your side going into the second half of this year - please reach out. We'd love to work with you and we know we can help you reach your goals in 2021!