Time to do the math on non-prime!

I literally never thought that I would write this article, or at least not think that I would be promoting this strategy, but it’s not only here, it’s likely to get even better! Non-prime has consistently been 2-4% over “standard” rates for conventional, government, or the most popular loans. Non-prime serves self-employed, foreign nationals, and investors primarily. Why should you even consider it now? Let me give a couple examples of how non-prime (or non-QM) is BETTER potentially right now and could even be more attractive in the coming months:

1. So anyone paying attention to mortgage rates in 2022 are seeing it skyrocket. Meanwhile, most non-prime (which are based on a separate standard) have not risen as much or in some cases, AT ALL! So the gap between the two is closing rapidly!
2. Take an example of a DSCR loan, which I have spoken about in a number of other articles, and is for investors looking for an easier route than conventional lending. Normally, conventional lending for an investor with less than 11 mortgaged properties is the best bet for rate and terms. Well, in a drastically rising rate environment, there are niches where this is no longer true. The difference is no longer 2-4+% which makes it a very good option even for less than 10 mortgaged properties!
3. Take another example of a 15% down with conventional versus non-QM, which admittedly is much harder to distinguish. One asterisk, this is not 15 years, this is comparing 30 years conventional (easily searched for the rates such as at bankrate.com) compared with one non-QM provider: at a 720+ credit score, they were recently showing 7.125%. Maybe you think that conventional is lower for the moment, but there is a bonus! What is the bonus? No private mortgage insurance with this non-prime lender, which could save a lot on the payment! They also accept one year of income documents (was your 2021 better than your 2020? This lender cares about that and would take the 2021 tax returns only)! Not to mention many, many other advantages, but simply put, in this market, depending on the niche, it could be better than traditional conventional lending.

So let’s do the calculations together! In the past, non-QM was necessary for some borrowers, otherwise the options weren’t that attractive unless you really needed them. But in a rising traditional rate market, a private lender offering non-prime loans may even help a prime customer! Go where they offer both to give you the best choice…

What have I learned from recent refinances?

Refinancing has been BIG for the mortgage industry the past 2 years in particular. While everyone wants the unicorn lower rate, lower payment, and shorter period of time, usually you have to give up or choose at least one of them. But there are SO many more reasons to refinance!

1. A recent customer took cash out to finish his home remodel.
2. A recent customer took cash out to consolidate his debt, still met his time frame goals and is saving on his monthly payments so much that he intends to pay it off in HALF the time!
3. A recent customer took cash out of his rental properties to buy another!
4. A recent customer took his loan term down 10 years (7+ more than he had left) and maintained about the same payment. Do the math on that one, he is paying the same payment as he would have had for 27+ years and now it’s 20!
5. A recent customer eliminated multiple minor liens that they had on their property, one mortgage payment now and saved per month.
6. A recent customer took out their Home Equity Line of Credit that they said about the balance: “never went down.”
7. A recent customer eliminated PMI that they had, taking advantage of the new appreciation that their home had already within 2 years of purchase! They refinanced conventionally with no mortgage insurance and saved $200+ a month in their mortgage payments!

What can I do for you?

Why is a mortgage specialist better than a bank? Part 5: DSCR Loans

When I started this series (see 1, 2, and 3 here), I thought only of how to differentiate the skill set, or the person. But then it struck me, the key to this explanation is for you to see the main difference between the two: access to more options (and here was #4 about bank statement loans, surprisingly, something a depository financial institution doesn’t have). And we all know more options equals more opportunities to get you into the home loan you are looking for.

What is a DSCR loan?

Debt service coverage ratio, simply put, using the rents from that 1-4 family investment property home to offset the total housing payment. In other words, none of your other income or debts are analyzed, just the subject property and it’s associated PITIA payment. So how does it work? Let’s say that your payment is $1,000, and your rent earned (as proved by the appraiser who gives an average rent for the area) is $1,250, then the ratio is 1.25 times the payment.

Can a bank do this? Possibly, but usually banks are so siloed with different departments that don’t talk to each other, that the commercial side can do this type of loan, but with many differences (I discussed them here). Suffice it to say, the banks are none too generous, they take a global approach (all of your rental properties) and do get down to taxes, reserves (for all properties), and usually do an ARM or some form of “renewable” loan where they look at your financials from every year to every few years to do their “loan review.”

Why is a mortgage specialist WAY better?

Especially if we have multiple options, the DSCR loan can do several things a bank commercial loan can’t:

1. The majority of these loans are a fixed rate for 30 years, there is the possibility of ARM’s and interest only as well.
2. The DSCR loan does not require tax forms.
3. The DSCR loan does not take into account your other rental properties.
4. The DSCR loan does not require “reserves” for all of your other rental properties.
5. The DSCR loan does not require your financials again, one time and done, just like a normal mortgage loan.
6. Even go to <1.0 DSCR, even no DSCR (ask me about that!) or in other words, a payment higher than the rent earned on the property. While this has extra requirements, the very possibility is unheard of in a bank.

So how is a mortgage specialist better than a bank with a DSCR loan? The commercial side of the bank is clunky, almost unmanageable, and certainly not for the small investor. The normal bank mortgage loan officer only knows the plain vanilla products offered by the bank and presents those options. I remember the 2 years of taxes “requirement.” I remember the minimum credit scores of 640 or 670 that are thrown around, simply none of that is true when you have more loan options available. Start your journey to no more financial reporting again here…

Don’t be real estate rich and flat broke!

I am often asked, should I get a mortgage, or just pay off my house? Well, why would I choose a fake house in a wrapper for this? Because that’s what can happen if you payoff real estate and can’t get to it! I have known many “millionaires” in my banking career who didn’t have bank accounts, didn’t have money on the side, etc., literally all of their assets were tied up in real estate. I remember one of them coming in with loose change to come up with payments on other accounts.

So it’s literally possible to be “rich” in real estate, and have nothing else to show for it. Of course, someone will argue about the rent that they can get, or they can just sell it, etc. But there is nothing certain in life. As many have said, plan for the best, prepare for the worst. We keep hearing the bust is coming, how can you prepare for it? How can you plan for the best at the same time?

So how can you make sure you aren’t paid off and have nothing to show for it?

This is not an exhaustive list, this is just some of the ideas that I have seen others use over the years:

1. Use the BRRRR method and cash out those paid off properties.
2. Setup a line of credit or commercial line of credit on your properties so you can “tap” that wrapped up equity.
3. Consider keeping a mortgage instead of paying off so quickly. Yes, this might go against a lot of older wisdom, but there are advantages to your credit, property taxes, and maybe even income taxes by maintaining a mortgage on the property. Bonus: you keep your cash for something else.
4. Pay yourself first. Yes, you may have said you were by paying off those rental properties, but you can now pay yourself through the rents. Make sure you put aside at least 10% if not more in savings, investments, or a retirement account.
5. Take advantage of grants and local redevelopment opportunities. Keep an eye out for opportunities to liquidate property that may be needed for government or utility use. Also keep an eye out for local grants to improve frontage, signage, etc.
6. I know someone who put up a billboard, while possibly not the prettiest thing, it is another source of earnings on his land. Whether it’s a cellphone antenna or a sign, it can mean extra income for you monthly.

None of these are new, or fantastic, but currently rates are historically low still, and people are talking about paying off mortgages?!? It seems like the wiser thing would be to hoard cash at super low rates and invest wisely at a better rate of return…

Start your plan here…

DSCR for every investment rental property!

Okay, maybe Debt Service Coverage Ratio is not for every rental property, most lenders require over $100,000 loan amount (still check with me if it’s above $75,000). But it’s important to understand what DSCR is, how it can help you, and some basic requirements.

To qualify for a DSCR loan, you must generally make money on your rental property. The basic formula for the ratio is RENTS / (PITI + HOA payment). So if your rents earned is more than your payment and homeowner’s association, you are in the money so to speak, or over 1.0 DSCR (there are/were lenders that go below 1.0 but don’t expect a good rate or easy ride with that, likely to be much more difficult in other factors). Likely your formula will hopefully be over 1.0 but less than 2.0 (unless you have a fantastically cash flowing rental!). The basis of giving you the loan is credit score (for pricing), you have money in the bank (“reserves”), loan to value (up to 80% maximum), and DSCR. Other factors (such as your overall or global debt to income including even other proof of income!) are ignored. This is also good from 1-4 units in a single building. They will do non-warrantable (or not approved by FHA/HUD such as those that are primarily owned by investors and rented out) condos! There is even a NO DSCR option! And they are willing to give interest only for 10 years, with a 30 year behind that, or 40 year loan! They also have fixed rates for 30 years.

Assuming that you are buying the property, this kind of loan can help you in the following ways:

1. Assuming your credit score is good and you have “reserves” and down payment (usually 20 or more %), you should expect that the rents will be determined by the appraiser going out there and doing an estimated rent for those unit(s).
2. You can title the property in an LLC from the beginning!

Assuming that you own the property already, and it’s rented, the following are reasons to refinance:

1. You can use your lease agreements with proof of rent collected, or if in the middle of a BRRRR, you could use the appraisal to show estimated rents as proof of rent.
2. The cash out limitations are not unreasonable, they actually are very similar to conventional.

Now, I do want to mention some negatives, they require reserves or payments in reserve, savings beyond the closing equal to 6 months of payments. You can’t be a first time homebuyer and use this type of loan for an investment property, they expect either you have a history of owning your own home or of rental property. You do need a solid credit history, while the credit score is not a huge factor in approval (the score is actually probably less than would often work for a conventional loan), it does determine the interest rate. Also, because this is an investment property loan and they are making exceptions on conventional lending, they do have a prepayment penalty equal to 6 months’ worth of interest. Last, but not least, the rates are higher than conventional, currently they are running somewhere around double, but I would say that perhaps 3-5% higher than the best rate possible for owner occupied is the range.

Start with your favorite lender for all your best options…

Why Non-QM is more important than ever!

Non-prime or non-QM can often be confused with subprime.  But there’s nothing subprime about some of the borrowers that are helped with non-QM lending.  So just what is non-QM?  How can it help you?  How can it help realtors to sell more homes?  Investors to buy more properties?  “Ineligible” borrowers to be eligible?

What is non-QM?

First of all, simply put it is a range of loans that fall outside of the standards used for common conventional and government loans.  Truths taught such as a certain credit score or a certain debt to income or a certain income proving method are all different possibilities with non-QM.  These are often done by private lenders or companies that have their own guidelines that they go by.  This means they could ask for more of one thing, or less, or even none of another.  There are often high down payment, high reserves (money in the bank beyond the down payment), and/or higher interest rates than are given to conventional and government loan customers.

So why in the world would I want a non-QM loan?

Eligibility.  Let me explain:

1. It’s rather simple, many self-employed borrowers fight against the fact that they write off or deduct so many expenses that it shows they don’t make anything.  So they have 2 choices when considering a home mortgage, remodel, or refinance, pay more in taxes and declare a greater net amount and hope it’s good enough for the lender, or go to work doing something similar for a W2 job.  I face this very conversation with self-employed borrowers daily.  But non-QM gives us 1099, bank statement, and even profit and loss lending that gives us yet another option to serve the self-employed borrower (What in the world is Non-QM?).
2. There are many real estate investors looking for a better way than the conventional way or the ungodly burdensome commercial way of calculating debt to income (Rental properties – Commercial loans or is there something even better?).  There seems to be a lot of issues in getting 1-4 family properties properly financed.  The commercial banks do loan reviews and can ask you to leave the bank at any moment!  The conventional way is onerous at best, only up to 10 mortgaged properties, and nearly impossible for a consistent investor at the worst.  But non-QM presents bank statement and DSCR (DSCR – yet another acronym in mortgage?)  loans to help investors to purchase properties.
3. Another group that is often overlooked in lending is both foreign nationals and those who hold ITIN or limited documentation.  This group has different needs (usually a second home or rental property for a foreign national and a primary residence for an ITIN holder), but there are non-QM options available to help both.
4. Last, but not least, we have past derogatory credit.  Credit score, foreclosure, bankruptcy, short sale, etc. are all covered by non-QM lenders that have options available.

What are some characteristics that non-QM lenders look for?

A typical non-QM client has the following characteristics:
1) They make money (just have another way of proving it)

2) They have money in an account (both for a large down payment and in excess)

3) They have high credit scores averaging in the 700’s

4) They need a significant loan (most average $450,000 or more as a whole, but this is not for $25,000 loans).

So when can you get started in helping yourself or as a realtor to help your clients get into homeownership, refinance, or remodel?  Start here: Your favorite lender

Have you been denied on a rental property because your debts are too high?

You applied for the rental property loan.  But what do you do if your debt is too high?  “Pay them off,” “put more down,” and “consolidate it all” (or “just refinance”) are all phrases I have heard said to people…

Why does this not work? 

“Pay them off” – this is easier said than done, and requires time usually to earn the money that you are going to then use to “pay them off.”  Bottom line: the seller may not be willing to wait for you to get around to paying them off, and it doesn’t factor in the unknown future where you might add to it instead of take it all away.

“Put more down” – this serves two purposes, it lowers the risk to the lender and therefore in theory they might tolerate more debt to income, and it makes this payment less.  Either way, it’s more than you planned on spending, and likely will only lead to equity that you can’t tap for a while (locking up that cash in equity).

“Consolidate it all” or “just refinance”- this depends on credit, existing equity, and you can never quite get to 100% loan to value again (VA loans rock!), so you risk paying for an appraisal and winding up not getting what you wanted to be able to consolidate debts.   In the meantime, the seller is probably not going to be willing to wait another month (or more) for this either.

What then is the solution? 

DSCR loans, or Debt Service Coverage Ratio, as I have mentioned before (DSCR – yet another acronym in mortgage?).  These loans use your cash flow (AKA rents) of the subject property to determine whether you can afford the payment including PITIA (Principal, Interest, Taxes, insurance, Association dues or fees if applicable).

‘Wait a minute,’ doesn’t my bank offer that?  As I have mentioned before (Rental properties – Commercial loans or is there something even better?), NO!  They offer a positive, often extremely positive ratio of 1.25-1.5 many times.  That means your rent earned has to exceed 1.25 times the payment, or as an example: a $1,000 payment has to have a $1,250 rent to afford it.  Multiply that out in higher amounts and you see the challenge of keeping up with rents vs. payments, especially on a single family residence!  And they require yearly financial reporting, what a headache!  The advantage that we have is going down as low as .80!  Yes, that’s below 1.0 (which a bank would consider “breaking even”).  And this type of loan does not consider other debts, it focuses on only your single property and does it cash flow?   And once it’s closed, it’s closed, no annual financial reporting headache!

What does it require? 

A good credit score helps, especially if you want competitive terms and lower ratios.  A good loan to value, especially if you are “cashing out” (Get some cash out on that rental property mortgage refinance!) on an existing property.  So basically you are looking at several normal criteria (credit and loan to value), but laser focused on the subject property’s cash flow vs. payment.  In other words, ask me if I can rescue your deal (Rescuer here)…