How Transitional Financing Can Help Near-Bankable Clients Become Refinance-Ready
Your client has found the right home, negotiated an accepted offer and is ready to move forward. The challenge is that their mortgage application falls just short of a bank or other conventional lender’s requirements.
They may have sufficient income, a reasonable down payment and the ability to manage the mortgage payments. However, limited self-employed income history, recovering credit, outstanding debt or a recent career change may prevent them from qualifying through conventional channels today.
Waiting another year or two could mean losing the property. For near-bankable borrowers with an achievable improvement plan, transitional financing may provide another option.
A transitional mortgage can allow a client to complete a home purchase today while using the next 12 or 24 months to address the specific issues preventing approval and work toward refinancing with a longer-term lender.
For example, a client may have recently become self-employed or transitioned to contract work in the same industry in which they were previously employed. Their experience, current earnings and overall financial position may support homeownership, but they may not yet have the documented income history required by their intended longer-term lender.
The strongest transitional financing strategy starts with the exit. Before the purchase closes, the mortgage broker and client should identify the qualification gap, the actions required to address it and the refinancing path they expect to pursue.
Why the Right Mortgage Term Matters
Calvert Home Mortgage Investment Corporation’s Term Purchase mortgage is a transitional financing solution available with closed terms of 12 or 24 months. The selected term should reflect how much time the client realistically needs to reach the milestones required for refinancing.
A 12-month closed term may be appropriate for an emerging prime client who is close to meeting a longer-term lender’s qualification requirements. This could include a client who needs additional time to document income, resolve a specific credit issue or reduce an outstanding debt.
A 24-month closed term may be more suitable when the client needs additional time to rebuild credit, establish a longer income history, reduce debt or strengthen their overall financial profile.
The appropriate term will depend on both the timing and certainty of the client’s improvement plan. Selecting too short a term may create unnecessary pressure, while selecting a longer term than required may not align with the client’s anticipated refinancing timeline.
Where earlier repayment or refinancing is reasonably expected, a 12-month open term may provide additional flexibility, subject to the client’s circumstances and the associated cost.
What Makes a Strong Transitional Financing Application?
Transitional financing should not be used to stretch a client into an unaffordable home purchase. A strong application should demonstrate both the ability to carry the mortgage and a credible, documented path toward refinancing.
When presenting a Term Purchase application, the mortgage broker should clearly explain:
- Why the client cannot qualify with the intended longer-term lender today
- How the client will comfortably carry the mortgage payments and related housing costs
- The specific financial or documentation milestones the client must achieve during the term
- What documentation will demonstrate the client’s progress
- Which refinancing options may become available if those milestones are achieved
- What backup plan exists if refinancing takes longer than anticipated
The more specific the plan, the easier it is to assess whether the mortgage term, affordability and proposed exit strategy are appropriately aligned.
Guiding the Client Beyond the Home Purchase
The mortgage broker’s role doesn’t end once the mortgage funds.
Regular check-ins can help the client remain focused on the steps required to pursue their refinancing goals. These conversations give the mortgage broker an opportunity to review what has improved, identify new challenges and adjust the plan when circumstances change.
Staying connected also keeps the mortgage broker top of mind well before the mortgage reaches maturity.
Several months before maturity, the mortgage broker can begin reviewing the client’s documentation, financial progress and available refinancing options. Starting early provides more time to address gaps and discuss alternatives if the original plan is no longer achievable.
At Calvert Home Mortgage, we notify mortgage brokers when their clients’ mortgages are approaching maturity, giving mortgage brokers time to reconnect and discuss their clients’ goals and next steps.
Connect Today’s Purchase to Tomorrow’s Financing Options
The value of transitional financing is not simply that it may help a client obtain financing today. Its value lies in intentionally connecting the purchase with a realistic, defined path toward longer-term financing.
By matching the client with an appropriate mortgage term, creating a credible exit strategy and providing ongoing guidance, mortgage brokers can help near-bankable clients pursue homeownership while working to strengthen their future financing options.
If you have a near-bankable client with a clear and achievable path toward longer-term financing, involve Calvert Home Mortgage. We can help assess whether transitional financing, the proposed term and the client’s exit strategy are appropriately aligned.
