How Many Pieces are In the Loan Jigsaw Puzzle

Your loan is like a jigsaw puzzle” is the author’s favorite analogy to explain the mortgage process to new clients.  While the sometimes-puzzled borrowers may not immediately understand, by the time we’ve finished our discussion we’re all on the same page.  They have a clear understanding of how loans are approved, what steps need to be taken (and which MUST be avoided), and most importantly, whether their pieces fit together easily or require considerable effort to assemble.

What’s meant by “puzzle pieces”?  Basically, we’re referencing the many factors mortgages (and real estate purchases) involve.  Income structure, employment history, debt ratios, down payment sources, appraisal concerns, property type, credit scores, and tax return details are just a few of the common pieces on most loans. 

Some loan puzzles are “kindergarten” variety.  You remember, the toddler versions, with 4 or so pieces, designed to be simple enough for a beginner to easily assemble.  You can practically see the puzzle’s picture before you even start.  Loan officers love “kindergarten” puzzle loans!  An example would be a salaried borrower who has 2 years+ in same position, no outside income, down payment funds in the bank, no credit issues, buying a single-family residence in a neighborhood of similar homes.  The pieces all fit neatly together; no headaches will result from assembling this puzzle!

Ever seen a 3-D puzzle with 1000 pieces?  The ones requiring a completely clear dining room table?  You won’t be finishing one of those in a day!  Some loans fall into the “jigsaw puzzle from hell” category, a myriad of weirdly shaped puzzle pieces.  A recent client “Jan” (name changed for privacy) was a prime example.  His “puzzle” was extraordinarily complex; fortunately, he understood that.

Jan wanted to refinance the condo his mom lived in near Chicago.  He owned the condo with his sister, along with 8 other rental condos and his primary residence.  Some of the condos were titled in 3 separate LLCs, one was owned with his wife, another with his sister.  All had rental income, operating expenses, mortgages and HOA fees.  Each condo’s income was divided among the several owners.  Despite being a salaried risk analyst at a federal institution, Jan’s income “puzzle piece” was far from simple.  Fortunately, Jan was financially astute, and knew from the start his puzzle would take time to assemble.  In fact, we might not know what the final picture looked like until we were well into the assembly process!

Our processing team laid out Jan’s “puzzle” on a large conference table:  2 years’ LLC returns in 3 stacks; his personal tax returns/W2s/paystubs in another; mortgage statements/insurance declarations pages/HOA invoices/property tax records for each property owned in 8 others.  Jan’s various asset statements and credit report completed the final stack.  Now all we had to do was “assemble the jigsaw pieces” to see what the picture looked like!

The “weird piece” in Jan’s puzzle was accurately determining his income.  While his salary calculation was simple, the tax returns (both personal and LLC) and net rental incomes were considerably more challenging.  We waited to order Jan’s appraisal until underwriting had confirmed our income calculations.  We don’t often run into loans where we want an underwriter to approve the file before we order the appraisal, perhaps one per year on average, but in Jan’s case, it was the prudent decision. Fortunately, the income calculations were correct, and his debt ratios met lending guidelines.  We exchanged cyber high fives, and ordered the appraisal.  The pieces were coming together!

Another significant component of Jan’s puzzle was that his mom, a senior on a fixed income, was the condo’s sole resident.  Several lenders Jan previously contacted deemed the condo an investment property, thus requiring higher rates and additional condo complex scrutiny.  We knew Fannie guidelines allowed it to be considered Jan’s primary residence (without the significantly higher rates and costs of an investment property mortgage), since Jan’s mom was retired, with minimal income.  We proved her Social Security was insufficient to qualify for a loan, provided the other required documentation, and underwriting agreed: the scenario met Fannie’s requirements, the condo could be considered Jan’s primary residence.  Another big puzzle piece fell into place!

Just as we thought we “saw” Jan’s full puzzle picture, a routine piece turned out to be anything but!  The appraiser stated the property was in a flood zone, and the flood certificate concurred.  There’s a piece we hadn’t anticipated!  Jan did not have a flood insurance policy on the condo.  We scoured Fannie guidelines on condo flood insurance, then called condo management for a copy of their flood insurance policy.  Sure enough, they had flood insurance, but the coverage was considerably less than the amount Fannie required. 

We checked FEMA’s records to confirm the flood zone rating, and they showed the condo’s address in a flood zone, requiring flood insurance.  Increasing the entire complex’s coverage amount would have been extraordinarily expensive, and wasn’t going to happen.  Fannie doesn’t allow individual owners in attached condos to purchase stand-alone flood policies to meet their requirements.  After assembling 999 of the 1000 pieces in Jan’s “3D loan puzzle”, it appeared the last piece might not fit.

Fortunately, Jan researched FEMA records and found a letter exempting the condo building (but NOT the address!) from flood insurance requirements.  This author, in over 20 years of originating loans, had never seen a similar situation, although they likely exist.

Bottom line?  Jan’s puzzle was complete, the loan closed, and our diligent collective efforts came to fruition. 

Before Jan reached out to us, his loan had been declined by several other lenders.  Most insisted the condo be considered a rental property, failing to comprehend Fannie’s guidelines.  Some simply shrugged their shoulders when presented with Jan’s multiple complex tax returns, then stopped responding to his calls/emails.  None even got to the “flood zone or not” question, our final and perhaps most challenging puzzle piece.

Whether your loan is the “kindergarten puzzle” variety or a vastly more complex one, finding an experienced, analytical loan officer (and his support staff) who understands lending guidelines helps avoid drama, sleepless nights, and inaccurate loan denials.  Ask the lenders you interview about their most challenging loans.  Ask them about your “loan jigsaw puzzle”, whether it’s simple or complex.  Ask them about their rates too but remember if they don’t assemble your “loan puzzle” correctly, the rate doesn’t matter!

Remember our “steps to be taken, and those that must be avoided” reference at the start of today’s blog?  Let’s look at a few “weird reasons” borrowers’ loans are sometimes denied: