Chris is an independent mortgage broker in the Bay Area serving all of California. He specializes in landlord loans because he found it to be an underserved niche in the industry. The bulk of his business comes from residential loans for owner-occupants, first time home buyers buying a house to live in. In this episode, Chris goes over the details about government loan guidelines, the benefits of using a mortgage broker, helpful tips, and how investors can get owner-occupied loans.
Federal Housing Administration (FHA) guidelines can be a struggle to follow and tend to be one size fits all. It has led to cases where a doctor, who was contracted to earn $20,000 a month, got declined for a mortgage while a formerly incarcerated car thief got approved.
The guidelines are not necessarily logical, so the people who end up getting a mortgage aren’t the ones you’d expect. The federal government controls either directly or indirectly up to 90% of the mortgage market.
The government created both Fannie Mae and Freddie Mac as private corporations that would buy mortgages from banks, which allows the bank to have the capital to give out more loans.
Local banks selling to Fannie Mae and Freddie Mac won’t originate non-saleable loans because they can’t be sold in the secondary market, and it’ll take them a long time to collect on the interest payments to get back their capital.
Jumbo loans aren’t backed by Fannie Mae and Freddie Mac too, but big banks back them since they plan to cross-sell their other financial goods and services. Jumbo loans are over the maximum loan amount dictated in the guidelines of Fannie Mae and Freddie Mac. At times, big banks might even offer incentives on their loans to push their other products.
Because 90% of new enterprises fail within the first two years, those who are self-employed need to show that they’re beyond that two year period. Both Fannie Mae and Freddie Mac will check the IRS tax code that applies to the individual and use that.
This means that new real estate investors who haven’t been in business for two years might find it difficult to get a loan.
Also, the government’s automated underwriting system will only look at the recent year’s tax returns when it does the income calculation.
While federal rules say that those on W-2 salary or employed are good to get loans, individual lenders, banks, and credit unions impose more restrictive rules than might require that you be on the same job for more than 6 months.
Pay increases of more than 20% might not get counted in the calculation of your average income.
Jumbo loans work with DTI ratios of 43% or less. Fannie Mae and Freddie Mac can go as high as 49.9%, but it’s best to stick to a threshold of 47% to have some wiggle room.
Car payments are homeownership killers as a $400 a month car payment is going to reduce your buying power by $80,000-100,000.
Most people with active student loans don’t apply for mortgages. They can apply for a home mortgage, but they don’t.
It all depends on who you are and how much risk threshold you have or how risky you are to the insurance carrier.
The PMI payment is calculated as 0.5% multiplied by the loan balance then divided by 12.
The same with car insurance and health insurance, it only becomes a waste of money if you’re someone deliberately acting in risky ways as the insurance carrier would charge more for your premiums compared to someone less risky.
Purchasing PMI early for a property that is appreciating is much better as you’d be paying lower premiums than if you purchase later after the property has appreciated in value.
The PMI gets cheaper at thresholds of 5%, 10%, and 15% down payment. Most people don’t put 13% or 17% down as it won’t improve their interest rate or reduce the PMI rate.
For government mortgage insurance, the insurance is there for the life of the loan. But FHA mortgage insurance is not judgemental about the FICO score.
Even though the insurance is there for the life of the loan, you can always refinance out.
For conventional loans, the mortgage insurance drops off at some point once you have equity.
A 500 FICO score and 10% down payment are good enough to go for the FHA. More options on the FHA opens up at a 580 FICO score.
For the conventional Fannie Mae and Freddie Mac, a 640 FICO score opens up the options.
Financing starts to look good at a 680 FICO score.
All low down payment options for FHA loans are for owner-occupied real estate only.
Your monthly rental income will affect your mortgage payment a bit but not a lot because your DTI ratio still needs to be under 50%.
In 8 of the 9 Bay Area counties, the maximum loan amount is $765,600 for a single-family home for both conventional and FHA loans.
But the maximum conforming loan limit changes every year.
The interest rates for the typical FHA 3 ½% down, the first-time buyer is now below 3%. For the other types, it’s in mid below three. Because of this, most people are refinancing now.
Mortgage points are an option for those willing to pay more in upfront fees to get lower rates. It’s effectively like prepaid interest. The conversion ratio is one point, which is 1% of your loan amount and fees will get you one quarter off your rate.
Whether it’s worth it to purchase the points depends on the property you’re getting and how liquid you are. Would you need funds to repair the house?
Refinancing is a good idea for an owner-occupied property that has rates at 4% and FICO scores around 500-600.
There’s no rule that mortgages have to be a 15-year or 30-year, fixed variety. You’re allowed to do all sorts of things in between. They’re called off-year loans or flex terms.
An owner-occupied loan only requires that you live on the property for 1 year. An investor can occupy the property for 1 year then purchase another house after a year under a single-family, 5% down loan, move to that house and convert the first house into a rental.
Gifts can be used as part of the down payment. Also, another person can be included in the title.
FHA loans aren’t exclusive to first time home buyers. But it can be problematic to have multiple FHA loans at once.
A mortgage broker can plug into multiple, different lenders if one lender won’t do it. They also do comparison shopping and can offer lower interest rates than when you go directly to a bank.
Underwriters can potentially cancel a loan and cause disastrous results for the home buyer. Even if you submit a perfect file, they’ll usually ask for something in addition to what you provided. In cases when a loan gets canceled because a lender was being more strict than the rules imposed by Fannie Mae, a mortgage broker can step in and find you another lender.
Chris says they usually close on first time home buyer loans in 2 ½ to 4 weeks.
Waiting for the paper from the borrower and the appraisal process are the two things that take a long time. Appraisals run two weeks now since a lot of people are refinancing.
The process starts with the borrower sending in the paperwork. Afterward, an independent company is called to appraise the property. The underwriting team then checks all the documents. When everything is good to go, it gets sent to escrow.
The ideal mortgage-backed security will change over time. A certain percentage will be Fannie Mae conforming, some FHA, some that are highly balanced, etc. Since Wall Street has different appetites for what they want and they change over time, mortgage brokers shop around for whoever is desperate for the type of loan that the market doesn’t have enough of.
This means that mortgage brokers get really good deals because they know who wants certain types of loans.
The private sector is the one setting the rates for mortgage interest rates, and it is based on what mortgage-backed securities are buying and selling for.
Interesting fact: Since November 16, U.S. President Trump’s tweets have been a strong predictor for mortgage rates. When he tweets about war, famine, and trade wars, interest rates drop as Wall Street gets scared and starts selling their high risk, higher return stocks. When America and the economy is great again, Wall Street starts selling their mortgage-backed securities for those that are higher risk.
Also, when there’s an impending announcement of lower interest rates by the federal government, mortgage rates would have dropped before the announcement. After the announcement, in case the mortgage rates were dropped too far, Wall Street will pull back and rates will go back up.
Proposition 13 sets your property tax bill at a fixed relationship with your purchase price, and it can only go up 2% per year even if the property appreciates 7% or more.
It gives tax incentives to long-term real estate ownership, and in most cases, it can be passed down to your children.
This means that inherited property might be cashflow positive as a rental property, but would not be for someone who bought it at fair market value and got the fair market property tax assessment at sales price.
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