Steve is a mortgage loan originator from Caliber Home Loans based out of San Francisco. He has been providing financing for borrowers for 30 years. He serves people who fit the traditional lending box and those who don’t fit the traditional lending box. Real estate agents and bankers refer to him as he’s able to provide a wide variety of lending solutions. In this episode, Steve talks about the financing options available to real estate investors.
Borrowers typically had to provide their tax returns or rely on short-term, private money lending. But there are now non-qualified mortgages which are for borrowers who own too many properties or have a limited liability company (LLC) that owns the properties.
Under traditional guidelines, those borrowers wouldn’t qualify based on the requirement to put in their income amount in the application. Now, the idea of using ability to pay came in. As long as the rent from the property covers the mortgage payments, taxes, and insurance then the borrower can qualify.
With private money lending, rates go anywhere from 6-12%. While 5-year fixed-rate loans have interest rates around 5%, there are prepayment penalties.
Borrowers who get non-qualified mortgages are usually retirees living on their social security and pension income. Steve is able to get them their loan without declaring their income.
Depending on the borrower’s situation, reverse mortgages can be a great option. It helps homeowners who are living in their own home and need to take cash out. It is a very aggressive negative amortization mortgage, so it is only done as the second to the last resort before selling the house.
Borrowers also have to be at least 62 years of age and have enough equity in the property.
The amount of money they can get can vary between $100,000-$1M for a property with no lien and worth $1M. They could either get a lump sum or a monthly amount.
A home equity line of credit is a much better resource for rental property owners. Plus, when the debt goes down and the value goes up, their heirs would get more equity in the future.
The funds rate from the Federal Reserve and the interest rate on fixed-year loans do not go in lockstep. Big banks are usually slow to drop prime rates when the Federal Reserve drops their rates. It’s the same with home equity lines of credit and other consumer credit items.
For loans that convert to LIBOR, if the LIBOR Index drops, the mortgage rates also drop. But only after the fixed period that has a fixed rate has passed. Also, the funds rate dropping doesn’t automatically mean LIBOR rates will drop.
When it comes to treasury securities and mortgage-backed securities, as prices go down, interest rates go up. Prices are affected when there are people buying or selling securities. When there are more people buying, prices go up. When there are more people selling, prices go down.
It’s difficult to predict what will happen. But it’s best to get all the paperwork and appraisal done now then lock in when interest rates drop. Banks do not have a lot of staff processing loans, so there might be an artificial inflation of interest rates because of the demand.
With most people working at home, the processing of loan applications will take longer. This year, we’re expecting $5 trillion in home loans compared to the $2 trillion in home loans last year.
When banks have plenty of demand, they will raise interest rates to prevent more applications from coming in.
For people looking to buy a property, it’s better to take a higher interest rate now and then renegotiate when interest rates drop.
Lenders might not be willing to renegotiate for a half percent drop. Or, if the lender has already spent so much on a hedge after locking in your interest rate. Relocking at a lower interest rate then won’t be worth it for them just to keep the loan.
A lot of Steven’s clients are buying investment properties. Many are glad that they sold their securities before the market dropped.
People still need to live somewhere. Everything is cyclical, but while securities and companies have gone to zero, that has never happened in real estate.
A lot of wealthy people made their money in real estate, especially for people in the Bay Area. So real estate is still a good investment.
Each loan has different guidelines. Some put a limit and will only allow four properties financed even if you have more properties. Some vendors are able to finance up to 10 properties.
There are also vendors that have an unlimited number of financed properties, but there are only a few of them.
Lenders still have limitations based on a certain maximum loan amount for a borrower regardless of their loan to value, credit score, how much money they have, etc. This is their way of limiting their exposure.
This program is for clients concerned about increasing interest rates and are looking for a 30-year fixed rate. They also don’t want to take out more than $1M and only have the minimum credit score of 680.
Borrowers with credit challenges can use the credit restoration team Steven works with. They offer a discount at signup, and they work on a month by month basis.
Steven’s team is able to get up to an 80% debt-to-income ratio. Whatever the challenges, he’s confident they’ll be able to find the right program to fit the guidelines.
Having a hedge fund as one of their investors, Caliber is able to offer a whole suite of loan products such as a bank statement program, a low down payment program for owner-occupied properties, and other programs for borrowers with low credit scores.
The 6-7 programs they offer are all non-qualified mortgages. So they won’t be sold to Fannie Mae and Freddie Mac.
Clients can get a variety of quotes on the same situation since they have more programs to offer.
Caliber Home Loans is technically a mortgage bank. They sell off loans, but they are also servicing a lot of loans and underwriting them for certain banks.
Mortgage banks have a source of credit, like a warehouse line of credit. It’s secured by loans, but the lender needs to make sure they are able to sell the loan to an investor. Not being able to sell loans have caused companies to shut down in the past.
Traditional loans require tax returns. To avoid borrowers who try to hide their losses, lenders will request for the transcript of a tax return from the Internal Revenue System (IRS), which is Form 4506-T. Lenders will use that to compare with the tax returns you showed them.
For those with amended tax returns, it is best to submit both the original and amended returns. If the numbers you provided don’t match, lenders might not immediately decline the loan, but they’ll ask questions.
There are a lot of misconceptions out there. Guidelines are changing all the time. Nothing is set in stone, so feel free to reach out even if you think you don’t qualify. Steven might be able provide a solution to get you from A to B.
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