Private Non-QM Lenders Have Dropped Their Rates

Most lenders will only extend Qualified Mortgages. A Qualified Mortgage (“QM”) is a kind of loan having more stringent pre-qualification requirements. QM lenders must show the regulators that they have determined, prior to closing, that you, as a borrower, have the ability to repay your mortgage. This is logical, and will continue to be the norm for conservative lenders. Since these conservative lenders in turn have conservative investors who ultimately purchase your mortgage, their investors also want nothing to do with non-QM loans.

But if I lend you money at 6% (say 2% higher than conventional rates because of some additional risk) – there is no doubt that I already have an investor for the loan I just gave you who is willing to pay me, say, 6.5% for the same loan. Why would an investor do that? Because in a large financial market, he too has someone else on the line willing to pay him something more – and so on, and the business is profitable all around.

The old 12-13% “hard money” loans were being advanced to people having unfavorable credit when standard mortgage interest rates were at 5-6%. Now these non-QM lenders have lowered their rates to 6-8%, when today’s 30-year conventional rates have only dropped to about 4%. It’s not a bad deal to pay slightly higher non-QM rates for a brief period until you have satisfied your lender’s seasoning period requirement – and then you can refinance with a conventional mortgage without a prepayment penalty.

Want a Mortgage? It’s Not Enough to Just Confess Your Sins!

Lenders will discover that you had a foreclosure – that you had student loan late fees – that you defaulted on your car loan – that you already sold the asset claimed on your loan application – that you were arrested several years ago – that you neglected to meet your child support obligations, etc.

It either comes out on your credit report or through the lender’s use of fraudguard security checks – or even when they just Google your name. Lenders have these and several other extensive background checks and “Know Your Customer (KYC)” procedures that they carefully follow.

If you don’t immediately disclose your Deed-in-Lieu of Foreclosure, do you really think they will believe you are providing them with all details on everything else for which they ask?

You will generally always need to write a Letter of Explanation (“LOX”) to address collection accounts and disputes/inquiries on your credit report. And what if your explanation is solely factual and not remorseful?

As useless as sentimentality might appear in the finance world, lenders want to look into your consciousness – otherwise they have nothing to support the notion that you will do everything you can to prevent another late mortgage payment or foreclosure. The parties recommending your loan need your cooperation in order to support you – because they only have their reputations if something goes wrong with your loan. If they have to work hard for someone who has been concealing the facts (intentionally or unintentionally), they are likely to move on to the next file.

A Key Question For Your Real Estate Agent

Does the Seller truly have the authority to sell the property to me?

Sounds pretty basic, but your real estate agent may not have asked the question. If they have, they probably took the word of the listing agent that there “shouldn’t be a problem”.

One of the biggest red flags is having a Seller who is a trustee. Not only should you quickly confirm that the declaration of trust, or trust agreement, exists and is fully executed (by all appropriate parties), but that the agreement hasn’t expired or been revoked. Without such confirmation, a whole host of issues could arise that might cast a shadow on whether you or your lender will receive clean title. And, by the way, the Seller’s name on the title report needs to match the owner of record on both the chain of title and appraisal.

Worst Case? Your lender will decline the loan based on an unacceptable title report, and you will have wasted untold amounts of time and money on a property that was just never going to close.

Best Case? Your closing will be delayed until the title company, escrow agent, attorneys, and lender can sort things out.

Finally, you might be surprised to find out later that your Seller would have been happy to provide you with certain documents you needed to satisfy yourself or your lender. All you needed to do was ask for a:

• Survey
• Owners policy of title insurance
• Statement showing annual premiums for homeowners or flood insurance
• Recent roof or wind mitigation report

Mortgages Can Be Like FISH!

Imagine if you could change your outlook on getting a mortgage – such that it actually became exciting? The topic may not be so incredibly gripping, but the message delivery can change everything.

The next time you go into the office, wouldn’t it be more fun to bring levity to an assignment?  You can still take your job seriously, without taking yourself too seriously.

Wouldn’t your clients and colleagues remember you more if you make their day?  How about complimenting someone today in a clever way that they will not soon forget.

Is it possible that your attitude could change by just showing up?  Watch what happens when you arrive on time and truly focus on what someone is saying to you.

Dr. Stephen C. Lundin

Dr. Stephen C. Lundin has written a number of bestselling books, including FISH!  It’s a must-read motivational book about these concepts, and is based on the business success story of Seattle’s world famous Pike Place Fish Market.  I was able to experience this Market several years ago when I was financing the construction of a nearby shopping center.  You have to see this place, their superb customer service skills, and how they mesmerize the audience by throwing and catching fish to be packaged and distributed.

I had the pleasure of meeting Stephen this week.  He is teaching a 7 session course on Leadership through the Indian River Chamber of Commerce, and the introductory session was engaging, fascinating, and fun – and well worth the time for anyone.

This Christmas: Treat Your Kids to a Down Payment!

It’s nice having our adult children home for the holidays.  But if they are still living at home throughout the year, it may be because they have insufficient liquidity to afford a down payment for their own home.

If you need to help them out, you can either:

1. Gift them the down payment, or

2. Co-sign their loan

Under the first option, as long as your son/daughter can demonstrate they have had the funds in their bank account for two full monthly statement periods, your gift would be treated as if it were their own savings.  And, the annual federal gift tax exclusion allows you to gift up to $14,000 in 2014 without it counting against your $5.34 million lifetime estate tax exemption.

If you elect to co-sign, then the down payment would come from you as a co-borrower (and so this would not be deemed a gift).  But make sure the mortgage payments are made on time, because your credit will otherwise be adversely affected.

This is a crucial time of year if you or your children are in the market for a mortgage, particularly if self-employed.  You will need to ensure that your 2014 tax return has sufficient income to support the required housing ratios.  As an example, what you expense may make or break the ability for you to obtain the loan amount you need – because it is the “net after expense income” that counts when qualifying for a mortgage (not the gross income you generate).

Tip the Scales in Your Favor: To Ensure Loan Approval

Your lender will eventually sell the loan they advance to you – it’s pretty much a given. They will do everything they can to “check the boxes” prior to approving your loan in order to make sure that either Fannie Mae will buy your loan, or that FHA will insure against the loss of principal.

Let’s say you just squeaked by with a Debt-To-Income Ratio of 43% (maximum percentage allowed under a Qualified Mortgage). Or, maybe your credit score just barely meets the lender’s minimum 620 requirement. Perhaps your income reduced over last year, and you know that the average earnings to support your loan will be tight.

If the decision is too close to call, your loan will be declined – that’s just the way it is today. So here are some discretionary “Compensating Factors” that can help to persuade the underwriter to stamp “approved” on your loan application:

• Avoid “payment shock” – i.e., when your proposed monthly mortgage payments are more than the current rent you pay (make sure you can verify the last 12 cancelled rent checks)
• Maintain 2-3 credit cards paid “as agreed”, at balances that are well below your total authorized amount (and don’t cancel your unused credit cards – the older they are the better)
• Come up with more than the minimum down payment (and demonstrate how you have been able to comfortably save your money – evidencing that you are prudent with your finances)
• Don’t change jobs too much – unless your income improves (especially with commission earnings)

It Goes Without Saying . . .

This is a great opportunity to formally introduce my new Compliance Officer, Robert Almquist. Robert has been my Vice President of Legal & Marketing since the inception of Ocean Mortgage Capital.  Although his responsibilities have always included compliance and industry regulations, it was fitting to also give him this official title.  Some of his related words of wisdom are shared with you below.

Every enforceable contract contains “express” terms. In the case of a written contract, those are the terms that are put into words and inserted into the document.

However, it is impossible to document every detail of a complex agreement or to anticipate every possible contingency that may arise. Further, many agreements provide for some discretion on the part of the parties. (A lease agreement may provide that the tenant may sublet “with the prior consent of the landlord”, however the lease may be silent as to when the landlord may withhold that consent).

To resolve disputes over agreements that are not explicit on key contract terms, or which leave discretion to a party, courts have recognized certain “implied” terms in contracts. (With respect to the “prior consent” example above, courts will usually find it was implied that consent would not be unreasonably withheld).

The most important of implied contract terms is known as “the implied covenant of good faith and fair dealing”. Simply put, each party to a contract must act in good faith and deal with the other party fairly.

(I want to emphasize that the foregoing is not legal advice and is for informational purposes only. If you have a contract issue that you think may involve breaches of the implied covenant of good faith and fair dealing, you should consult with legal counsel in your jurisdiction.)

OOPS: I Bought My Rental Property in an LLC…

If you own title to a residential rental property via an LLC (“limited liability company”), then you better have owned this asset for at least 24 months and reported it on Schedule E of your 1040 tax return – otherwise you will have a tough time utilizing the income from this property to qualify for a loan.  Without the 24-month seasoning period, there is a good chance the net rental income cannot be used in calculating your Debt-to-Income ratio (DTI) unless you elect to transfer title from the LLC to your individual name.

Now don’t rush out and transfer the ownership from the LLC to yourself personally without first consulting with your accountant and lawyer – especially because of the potential tax ramifications and liability risks.  But you won’t get conventional residential financing for your LLC rental property, because the lender will treat it as if it were a commercial property (which means lower LTV requirements and higher pricing – even if you personally guarantee the loan).

On the other hand, if title is in your name, then typically 100% of the income and expenses on Schedule E can be used to calculate your DTI – without having to comply with the 24-month rule.  In addition, if the property is so new that it has not yet been reported on your previous tax return, then some lenders will allow you to use 75% of the revenue (confirmed via the lease) less PITI, with only 75% used to account for other standard expenses you will incur.

Declined Again? Don’t Give Up!

It’s been two weeks since your lender told you: “Your loan approval is coming any day now”. Guess what – you have a problem!

Yet you were told your credit score is acceptable, your debt-to-income ratio is comfortably below 43%, and your savings will satisfy the down payment, reserve and closing cost requirements…

Well, unfortunately it didn’t register with your lending officer that you are renting the home you are buying, and that in lieu of rent you are paying for utilities and capital improvements (plus you paid cash for almost all of your housing expenses, and do not have much of a checking account paper trail). And, by the way, the landlord is in default with her lender who is about to foreclose on the home you want to purchase! [Yes, this is a real example]

Without proper explanation, the ultimate buyer of your loan (Fannie Mae) would most definitely conclude that you do not have an arm’s length or independent relationship with your landlord. More importantly, this loan will require too much effort for most lenders, especially if you do not have an established working relationship with them.

By: (i) properly and clearly documenting your receipts, (ii) demonstrating the legality and reasonability of your tenancy, (iii) evidencing proof of your residency, and (iv) ensuring you have an adequate letter of explanation acknowledged by yourself and your landlord, you should be able to get the loan – and avoid having to move your family elsewhere.

Flippers Beware!

Let’s say you buy a residential investment property for $150,000 using cash.  You fully expect to get a renter, but first need to make some improvements to the property.  So, being as smart as you are, you postpone financing the property because you should undoubtedly be able to get higher loan proceeds after you enhance value to $200,000 – right? Most lenders will not advance more than 75% of the original purchase price for the “Cash-Out Refinancing” of investment properties – until at least 12 months after the purchase.  This means that you cannot get a loan based on value during that time frame, unless you obtain the loan from a “portfolio” lender (a lender who can maintain the loan on their own books without either selling it to FNMA or having it guaranteed by FHA).  Nothing wrong with getting a portfolio loan, but they are oftentimes more expensive.

The government enforced this idea in order to prevent the flipping of homes.  Before the housing crisis, investors were bidding up the price of homes via quick cash closings, only to turn around and either quickly selling for a higher price or financing virtually 100% of the price right after closing (there were several lending programs that made it easy for them to do so).  Thus, the government wanted to prevent NON-owner occupant borrowers from continuing the same flipping practices – mainly in order to avoid purchasing or guaranteeing a loan secured by properties with inflated values.