How to Get Approved for a Mortgage (Step-by-Step)

Ashley:
This is Real Estate Rookie, episode number 400 and Niner. Today we are on a part two of our three part miniseries to help you understand the fundamentals of funding. I’m Ashley Care and I’m here with Tony j Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now as a quick recap on episode 4 0 8, we covered the different types of lending and how each real estate deal may require a different type of lending. Now we also covered what you need to know about lending, but today we’re going to put that knowledge into action. So we’re going to get into the specifics of implementing conventional funding, and then we’re going to cover the timeline A to Z so you know exactly what to expect as a real estate rookie investor. And most importantly, we’re going to cover some of the red flags you should be looking out for. Super excited to welcome today’s guest, Jeff Wogan, who I’ve worked with personally on quite a few deals in my portfolio, and he’s helped a lot of folks I know as well. So Jeff, welcome to the Real Estate Rookie podcast. Super excited to have you here, brother.

Jeff:
Yeah, thank you for having me on, guys. Looking forward to this.

Ashley:
Jeff, first I want to know what are some wild stories you have here? I mean, obviously you have Tony as a client, so I’m sure there’s a lot to unpack there. But in today’s market, do you have anything that’s crazy that’s going on lending story wise?

Jeff:
Yeah, back then in oh eight leading up to that period, I mean, look, it was a wild time. I mean, my industry was literally the wild west. I mean, we were refinancing the same clients every few months. They were coming to us with their credit cards that needed to be paid off, and then they were calling us 60 days later to pay off the same credit cards. And so there’s been a lot of checks and balances put in place now to where we’re not repeating those same cycles. I mean, we were doing 125% financing back there. Back then we could do a hundred percent, 125% cash out of the property’s value. It was wild times. But coming out of that, my industry was regulated. We’re now all licensed and we’re obviously not seeing a lot of the same issues in my industry that we were back then.

Jeff:
And now, fast forward to the point we are in 2020 and beyond. I mean, we literally just went through another period where with rates falling off a cliff as quickly as they did, a lot of people jumped into the industry to make a quick buck. And that’s why it has been so inconsistent on my side for investors and why it’s been so challenging because a lot of these people that have jumped into the industry just don’t have the experience level to work with investors on this level. And that’s why as most investors have so many horse stories, and I mean, let’s be honest, how many people love the loan process? I mean, either of you love taking out a loan even with you, Tony, we’ve worked together so many times over the years. I mean, we’ve had our problems. And the reality is is that mortgage lending is very challenging.

Jeff:
There are a million different variables, and it doesn’t matter how good you are in this industry, you’re going to have problems. And really the big differences from a lot of the lenders that are inexperienced is they just bury their head in the sand and they don’t confront the problems. They don’t communicate it to the clients and the agents that are involved. And so that is one thing that really will help new investors as they’re getting more involved. Ask a lot of questions. I mean, you’ve got to ask questions. You’ve got to be your own best advocate. If you don’t like the answers that you’re getting, move on. I mean, there’s plenty of great loan officers out there that can help you that are experienced. And I mean, the reality is that working with real estate investors is the most difficult thing you can do in my career. There are so many nuances and complexities to this space that it’s one of the things I love because it keeps me on my toes constantly. It’s never a dull moment and it’s always something new. But when you’re just starting out, it’s challenging and it’s an uphill battle just to, let’s say, get a first time home buyer program through or loan through for a first time home buyer, let alone some of these complex investing programs that we have.

Tony:
Jeff, you mentioned the influx of new mortgage officers coming into this space. I guess, what’s your take on people in your position kind of being almost, I guess like a fiduciary for their clients? What’s your take on that? Because there’s a lot of people who maybe don’t have that same perspective coming into this for the first time.

Jeff:
It’s a great question. I mean, we should, as loan originators be taking that stance and really looking out for our client’s best interest, but we do not have that level of responsibility legally. So you will find some companies that truly take this as a mortgage advisor approach, like a certified financial advisor or something along those lines that takes their career that serious to that level where they’re constantly looking out for their client’s best interest, not their own. And what’s interesting in my industry is that you’ve got both sides. And again, you have a lot of people that just jumping in and out of the industry when the good times roll and jump right back out at the first sign of trouble. And you have others that have been in this for 10, 20, 30 years that truly treat this as a career. And they educate themselves. They spend the time, the money and the energy to truly become a mortgage professional.

Jeff:
And they treat it as such because their livelihood. And so there are plenty, like I said, there are plenty of great loan officers out there. And so again, for people that are just starting true rookies, you really need to talk to a few different loan officers. You’re not always going to get the best advice from the big banks or somebody that you may get referred by a friend or a family member that’s done one loan. You’re going to want to talk to multiple different people and really try to find the person that you fit best with and then also do your research. I mean, it’s the best advice I can give you as to go on Google who you’re working with, the company, the loan officer. There’s not a lot of information out there on that person. Move on. You can also check the NMLS. It’s the National Mortgage Licensing System that we all have our licenses through now to see if there’s been any negative marks or any type of actions taken by the government. And so that would be a great place to start while you’re trying to build your team because it is so incredibly important to have the right team, the experienced team on your side in order to ensure your long-term success.

Ashley:
And Jeff, real quick, can you maybe tell us what some of the red flags are as into who’s maybe someone you shouldn’t work with?

Jeff:
Yeah, especially in this space, ask about their investing experience, how long they’ve been in the business, but more importantly, talk about some of the projects they’ve worked on, their portfolio. Where are you investing, what strategies? And then ask ’em about their clients recent deals that they’ve done and get into the details with them. And if it’s vague, if they’re skirting the issue or you don’t like the answer, move on.

Ashley:
Okay, we’re going to take a short break and when we come back, we’re going to get into some of the conventional lending questions and also misconceptions that rookies need to know before they fund their first or next deal. Okay, you guys, welcome back. We are here with Jeff. We just went over some of the fiduciary duties that loan officers should have to you and what are some red flags when shopping for your loan officer. But right now we’re going to talk about some misconceptions and maybe questions you should have as a rookie investor trying to find the lender to work with. So Jeff, what are some of those leading misconceptions?

Jeff:
Well, the first one is is that you need to put 20% down or have 20% saved. I mean, right now there we’ve gone through a transition over the last couple of years where we’re repeating a cycle very similar to coming out of the Clinton administration through the mid to late two thousands where the big pushback then was to get as many first time home buyers and low to moderate income families and renters into homes so they can experience the American dream. And so now with the Biden administration with what they’ve done over the past couple of years, they’ve rolled out more down payment assistance money than we’ve seen since the mid two thousands to where you can buy your first house for basically no money down. We can do anywhere from a hundred to 105% financing depending on where you live because with down payment assistance programs, it varies by state because every state has their own HFA, which is housing financing our finance agency.

Jeff:
And so it, there’s no national standard yet, but they’re working on what’s called a DPA a one program, which will federalize it. And supposedly that’s coming down the pike possibly next year. But for now, depending on where you live, I’m out in California, we can do up to 105% financing, and that means a hundred percent of the purchase price plus 5% of the closing costs. And so we have clients in certain areas that are coming in and buying houses for just a few thousand dollars because you come in with a little bit of the closing costs and then the appraisal fee and the inspection fee. And then there’s other places where, for instance, up in Idaho, they do 1 0 3. There’s other places that do 1 0 4 financing, but we do have a nationwide program that’s everywhere. We’re licensed everywhere except for New York. So we can do this in 49 states and no Puerto Rico unfortunately, but we can go up to 101.5% financing where we can do a hundred percent of the purchase price plus one and a half percent of the closing costs.

Jeff:
And what’s nice about this program is it allows for up to two units where most down payment assistance programs are only single unit. So one unit only condo townhouses or SFRs. This program that is nationwide does allow for up to two units. And then the big game changer for investors with this program specifically was is that there’s no income limits. So there’s a lot of the programs out there that are available on the statewide level have income limits where if you exceed a certain level you can’t qualify. And most of them also have first time home buyer requirement, which means you cannot have owned a home in the past three years When you hear a first time home buyer, it doesn’t mean you can’t have ever owned a home, it just means you cannot have owned one in the past three years. And with most of these down payment assistance programs, they do have that requirement where you can not have owned a home in the last three years.

Jeff:
But with this specific program that I’m mentioning, the 1 0 1 0.5 program, it does not have a first time home buyer requirement. So you can use this to buy your next house. And this leads into one of the strategies that most investors will use to get their start, which is the annual move up strategy where what we do is we have our clients come in, they do their first purchase, they do down payment assistance on the first one, live in it for a year, and then you can buy your next property. And with that next property, you can do anywhere, depending on the type of property and the radius of where you’re currently living, you can do anywhere from that down payment assistance program at the 1 0 1 0.5 all the way to a 5% down option where you can actually do up to four units with that 5% down option.

Jeff:
And what you end up doing is every year, I have clients that have done this every year for eight or 10 years, and you can build your portfolio this way. It’s a slower way to scale, but this is the option that requires the least amount of capital in order to get started because you can buy that first house with no money or very little money and then buy your next one and then buy your next one. And so you can have three properties within two years with very little money out of pocket. And what’s here recently over the last six months is that Fannie Mae opened up the 5% down unit option where you can do up to four units with 5% down on a primary residence, which was a game changer. And there’s no self-sufficiency test, which I can talk about if you guys would like.

Jeff:
That is a requirement on the FHA side. But what you can do is you can go in, buy a three or four unit for your first property, if you can put 5% down, then buy your next one a year later, and then another one the following year. And we can use the rents to help you qualify for each property from the units that you’re running and the one that you’re leaving each time, which is your departing residence rent or departing residence. And you can theoretically have 12 doors within three years doing this if you have, you can go from a four unit to a four unit to another four unit and build your portfolio that way in a relatively short period of time.

Ashley:
This is a lot of information and when we have people coming on talking about the different loan products they use, there’s really a ton of options out there. So what are the questions we need to ask to find out what’s available instead of just a loan officer trying to pitch me what he thinks is good? And is that even the way that works? Do loan officers actually try to lere you towards one product or another?

Jeff:
That is a great question, and that is one of the things that changed after the great recession where as a loan officer, we can no longer manipulate interest rates to make more money or anything like that. And there’s no benefit to us to say go this direction or that direction. But what happens is, is that loan officers kind of get tunnel vision where they may be looking at a client’s credit file and overall situation and say, okay, this is the way that it’s going to work. And they move on because it’s kind of that turn and burn mentality. They’re going for volume, they’re not really looking out for the client’s best interest, they’re just trying to get it in and get it out and get it moving. And so what you need to do is ask what other options are available and really ask those probing questions. And if you loan officer isn’t asking you questions, do you potentially have a co-signer? Do you have gift funds to really explore what options are available? I mean, one of the things that we do is I’ll throw out all of the options to get creative and see what sticks and see what options may be beneficial for each of our clients to really try to put together the best possible plan for them.

Tony:
Yeah, Jeff, and that brings me to another question. I think a lot of people don’t understand that every lender, every loan officer, every institution has slightly different products that they offer as well. So I guess what’s your advice to a Ricky who’s maybe trying to take down that first deal in terms of trying to, I dunno, I guess maybe shop around, what should they be looking for? How are they making that comparison between one lender and another?

Jeff:
Yeah, again, doing their research, but starting that conversation as early as possible so that way they can find the loan officer that they want to work with and really start building the team. I mean, BiggerPockets does a great job with this of really trying to help everybody, the community, build their team on solid foundation with the right people that are the industry experts. And I would say, again, trying to get out in front of this as early as possible. I can’t tell you how many clients I’ve had over the years that come to me with a property and I want to put an offer in on this, but we’ve got three months worth of work before they’re going to qualify for that. So as early as you can start putting together a plan with your agent and your loan officer, so that way you can really connect the dots, because a lot of times it may mean that you need to pay a credit card down or there’s things that you can do to get your credit score up. They’ll open up more doors to better programs. And the sooner you can find those things out, the easier the process is going to be.

Tony:
So Jeff, you talked about paying down credit cards and just having that conversation with your loan officer early so you have the right roadmap and preparation in place. What are some other things or Ricky can do to be more prepared when it comes time to have that conversation with their lender? Yeah,

Jeff:
That’s a great question. Have a good understanding of what their credit looks like. Income put together, your W twos, your pay stubs, that kind of stuff. Because basically your personal financial statement, most rookies are not going to have a detailed PFS, but if you can at least have a general idea of what you’re making, we’re doing two year look backs when it comes to employment, so we’ll need to know where you’ve worked for the past couple of years. Some of the things that are important from a lending standpoint is are you a salaried employee? Do you receive bonuses, commission? Are you self-employed? If you are, tell us about the business because there’s ways to get creative with business income. And so just discussing that, and again, so we could put together that plan strategically because you want to make sure that when you’re going into this, you’ll know what the max is that you qualify for and provide clarity.

Jeff:
Really, we always try to do what loan officers should be doing. What we make a practice of doing is try to provide as much clarity as possible because there are so many different ways to get creative just by making small changes. And again, what we were talking about with credit, a lot of times, let’s just say we’re looking at a client that may have a lower credit score, there are ways to still get deals done with lower credit scores. For instance. I mean with all of these down payment assistance programs, it’s a minimum of a 600 credit score right now, and we can even go all the way down to a 500 credit score with 10% down. And it is shocking how relatively easy it is to get those deals through Fannie Mae and Freddie Mac right now because the emphasis is on the lower income individuals or families that may have the best credit scores. And so that’s why no matter how bad the situation is, even if you filed bankruptcy or something along those lines, have a conversation with your loan officer about this because nine times out of 10, it’s not as bad as you think.

Ashley:
What about if you’re getting your loan with an LLC? You aren’t using your personal name, you’re getting an LLC. I feel like there’s a, and this might not be a misconception, but that you need to build credit before you can go out and get a loan for your LLC. Is that true? And what information do you need from the borrower upfront and they should have prepared if you’re going to purchase this property in an LLC or refinance it?

Jeff:
That’s a great question. So yeah, we don’t need established credit for the LLC specifically is non-conventional financing like the DSCR loan. And there’s some other products on that side as well, if you guys want to talk about those. But with, let’s just use the DSCR as the example with that program, we can close directly in the entity or the LLCs name, the LLC does not need have established credit. You can set up that LLC while you’re in contract while we’re working on the loan. And it’s very easy to close in that LLC without a bank account or any type of credit. On the conventional side, it’s a little more challenging because with the programs that we’re talking about with the primary residents down payment assistance, and then some of the programs that we do for investment properties and second home loans, there’s other requirements where it has to be closed in your name and then you can transfer with us. You can transfer the title into an LLC for protection purposes after you make your first payment. And we don’t accelerate the due on sale clause.

Ashley:
Wow, that is very comforting to here because a lot of people do do that no matter what their loan documents say as they go ahead, but the fact that it’s allowed in, is there any kind of rule or something in the clause that says that you have to keep the same ownership interest or can it change the LLC and it doesn’t matter who the owners are anymore?

Jeff:
Yeah, that’s a great question. So we request that you stay a majority managing member because the reason why that rule is there, it’s a foreclosure rule. When we’re looking at any type of financing, even on the non-conventional side, we have to have a majority ownership behind the loan because of the fact that if we have to foreclose and we only have a minority share, it makes it very difficult to foreclose. So same thing on the conventional side. You still need to maintain a majority managing share of the LLC. And then the way I like to explain this is it’s not a government rule. It’s not Fannie Mae or Freddie Mac that’s requiring this due on sale to be in the contract. It’s us as the lender to cover us. And it’s really there for all of the sub two stuff and the creative stuff that we all hear about.

Jeff:
Because if we do find out about it, if you’re a place or selling a place and leaving the loan in your name and transferring title to somebody else, we’re going to accelerate the due on sale if we find out about it. The way that it gets caught is if, and this is my investor hat I’m putting on now, I’m taking the lender hat off and putting the investor hat on. The way that it gets caught is if a payment’s missed or taxes aren’t paid on time or insurance doesn’t get paid, if you give us a reason to investigate, we’re going to find it and then we will accelerate the due on sale with the other side of it. What we were talking about, if you’re moving it in solely for protection purposes, we’re okay with it. Not every servicer is. So I’ve had clients that have called some of the big banks and they say no.

Jeff:
And so the way I like to explain this to my clients is when you’re buying short-term rentals, you have people coming in and out all the time because you’re basically more in the hospitality business than you are in the real estate investing business. So in that case, what’s riskier having a short-term rental in your personal name where you’re personally exposed, if somebody slips and falls or they throw a party and jump off the roof and break their neck, you’re personally exposed to any liability and all of your personal assets are exposed with moving it into an LLC, you protect yourself. Always recommend one LLC per property instead of putting multiple into one, always recommend one LLC per property. And then that way you’re protected if let’s just say later down the road, five years from now, my industry sentiment changes and we all decide to start accelerating the due on sale.

Jeff:
All you have to do is remedy the situation. We’re not going to come take the collateral. I know the big fear out there is is the servicer going to come foreclose on the property As long as you don’t bury your head in the sand and you’re in communication with the servicer at that time, if that were to ever happen, all you have to do is pull the title, put it back in your name, refinance the loan under a loan product like the DSCR, one of the non-conventional products that allow for us to carry it a new in a LL C’s name.

Tony:
Jeff, I always say you’re obviously a wealth of knowledge when it comes to the lending industry. And for all of our Ricks that are listening, don’t feel like you got to take copious notes on every single piece that we’re talking through right now. I think the goal of today’s conversation is to give you some of that awareness and just kind of highlight the value of working with the lender who knows, who knows the ins and outs of their industry, and just the big picture things you should be looking out for. So Jeff, appreciate you walking through some of those things rookies should be looking at as they’re looking to get that first loan product for that next one in place. Now guys, we’re going to be covering credit pools. I know the whole inquiry situation, it’s a big concern for a lot of rookie real estate investors. We’ll talk about how to leverage relationships and really just the process and timeline for the overall lending journey for real estate investors as well, right after a quick word from today’s show sponsors. Alright, we are back and we are here with Jeff Wogan, experienced conventional lender and all kinds of lender extraordinaire. Now in the last portion of today’s show, we’re going to cover the A to Z process of getting that loan in place. So Jeff, let’s talk about that process, right? The A to Z, what is the actual timeline to get the lender involved

Jeff:
As early as possible? I mean, this is the most important part of the process and everybody puts the cart before the horse and you need to have a pre-approval in hand before you start shopping because otherwise you have no idea what you truly qualify for. And we all have a general assumption that, oh, I should be able to qualify for X amount. And a lot of times that is a ways off from what our clients actually qualify for once we do the deeper dive.

Ashley:
Okay. And then what about the next thing is the initial meeting, do you have to meet in person? Should they have a virtual conversation? Is it okay to do this in email? What actually happens during that initial conversation?

Jeff:
That’s a great question. Yeah, 20 years ago we did a lot of in-person or even 10 years ago. But nowadays with what’s happened over the last few years, I mean everything’s done over Zoom or over the phone and yeah, the need or there’s no need to go into an actual establishment if you want to, by all means. I mean, if it gives you that level of comfort to go sit down and if it is somebody that’s local, I would say do that. I mean it’s go build that relationship. But it’s so easy nowadays that I would say 90% of our meetings are done over Zoom.

Tony:
Ashley, have you met all of your lenders in person? I’ve

Ashley:
Done a couple deals with online financial institutions, I guess. And right now I’m doing one with David Green’s team, the one brokerage, and I haven’t met them. I was just thinking about how basically everything is on email. I never did a zoom call or anything, which is my preference. But he has called me maybe two times and I’ll be like, why is he calling me? What’s wrong? Whatever. And he’ll just be like to ask me a quick question because that might be his preference to just call and ask real quick. But I always just prefer or he’ll text me, which I prefer too. But it was just funny. My initial thought was like, he’s calling me, is there something wrong? What’s going on?

Tony:
Most of my lenders I’ve probably worked with for over a year, I think before I ever actually met them in person. Jeff and I, we met at one of our events, one of the RideAlong events, first one of my other lenders, I met her at another conference in Nashville. You don’t need to really be local anymore to make the relationship work. Well, Jeff, I know one concern that I hear from a lot of Ricky Investors is the whole credit pool question. So I guess does that initial conversation lead to my credit being pooled? And if so, what’s the impact of

Jeff:
That? So yeah, this has really changed over the last six months to a year. There’s really no need for a hard credit poll at the initial pre-approval stage unless there’s been significant credit issues where we need to see all three scores. The soft credit poll really is the new norm, but I know there’s a lot of lenders out there are, they’re still doing hard credit checks. So my recommendation is check with your lenders, see if they’re doing soft polls. If they’re not, you need to let them know that they do not have authorization to do a hard check and you need to put it in writing. I can’t tell you how many clients I’ve talked to over the last few years that have told they’re specifically verbally told their los not to pull credit, and then they go ahead and do it anyways and then they find out about it.

Jeff:
So just make sure you’re putting that in writing because when you do, you can go back and unravel that if they do the hard check. But nowadays, I mean we’re doing soft polls for all of our credit, all of our clients’ credit, it’s a single bureau soft pull doesn’t impact their credit scores. It doesn’t show up as a credit poll. And the best part with this is, is that it doesn’t turn into a trigger lead, which every time we pull credit, it triggers to the bureaus. We do that hard check. It triggers to the bureaus that you’re shopping for a mortgage and then they sell your information as a lead to other mortgage companies. So that’s why you always get bombarded with a million phone calls and emails and texts. We always get blamed for it. It’s not our fault. We’re as an industry trying to stop it right now.

Jeff:
There’s a bill that we’re working on getting passed in the house. We’ll see if it goes anywhere cause there’s so much money involved in this that the credit agencies have a huge lobby. But the workaround on this is if you guys go to the optout screening optout prescreen.com, you can go on there and opt out for five years and it’s really easy. Just got to put in all your info, but just a little bit of advice with this. They’ve got little tricks in there. You’ve got to actually click the bubble, it defaults to opt-in, so click the opt out for five years. You actually have to physically do that. And then when you go to the next page, you’ve got to put all your information in there. You’ve got to make sure you put your birth date in the correct way. It’s dashes not forward.

Jeff:
Slashes we’re all used to. They do little tricks to make it challenging. And then you’ve got to put in the code just right or the I’m not a robot code. And then make sure you wait for the confirmation on the next page. Make sure that comes through and I print a copy for your records or save it as a PDF and then go on to the do not call registry. I mean, that’s the easy one too. Just go on to do not call. I think it’s do not call registry.gov. And then when you go on there, the trick with this one is, is that they send you an email that you have to confirm. So there’s these multi-layers of steps that they hope people get tripped up on. So you just make sure that when you get that email that you confirm it and then this should stop it. But you do need to try to do this as early as possible because it takes about five days for it to kick in. So if you’re applying for a loan and they’re pulling your credit, it’s already too late. But I would still say do it because should stop it. And then if next time you buy your place, I mean you’re opted out for five years and this way you’re not getting bombarded.

Tony:
I think that’s a really important thing because a lot of people get nervous about like, oh, I don’t want to get pre-approved because I don’t want to hard in clear my credit report. But you just walk through what that process looks like. So Jeff, maybe explain the blueprint, right? Say I’ve got my first deal, I have an accepted offer. What comes next

Jeff:
Step is, so assuming that you’re working with a loan officer and you’ve been pre-approved, it is pretty easy. So we get the contract, we get everything moving, and it takes about three weeks from start to finish. And basically what we’ll need to do once you’re in contract, we’re going to be in contact with your agents. Us for instance, we’re already, we get out in front of this, we talk to your agents when you’re submitting offers, so we know when the offer’s coming in. But on the other end, basically what ends up happening is, is that the file goes into processing, the processor is then going to put together an updated list of documents that we need. And one of the questions I always get is, well, how come you guys can’t give us a complete list upfront? What this is always one of the biggest thorns in borrower size or client sides is that we as an industry, everybody’s situation’s different and we collectively can’t come up with just one generic list for everyone.

Jeff:
So it’s important. I know when investors are just starting out, it gets very frustrating when we’re asking for things over and over again. If your lender is asking for the same things over and over again, that would make me question who you’re working with. But otherwise, when we get a list of documents out to our clients, it’s usually a jumping off point. And a lot of times it’s like a tree. You figure when we get conditions back in, those conditions may lead to another set of conditions and we don’t know each client’s full credit profile and situation until we have a chance to review everything. And so that’s why you may get multiple lists of documents as you move forward through the process. Then it goes to underwriting, and then there’s another set of conditions that come out. And then once we get those in, sometimes there could be additional conditions before we can send it back in for the final underwrite where we get the clear to

Tony:
Close. So Jeff, in our last episode in this funding series, we talked briefly about the difference between a broker, a direct lender. So for the process that you’ve seen, how does that kind of underwriting and processing vary depending on whether they’re keeping the loan on the books themselves or if it’s being sold to a third party servicer? And I guess how does it impact the person who’s actually borrowing the debt?

Jeff:
So there are some great brokers out there, there’s great direct lenders as well. The big difference is on the brokers side, they’re middleman. They’re brokering the loan to one of the bigger lenders out there, and there’s a lot of different places that they broker loans to depending on the type of product, the type of loan. But on the other side, the direct lender has established warehouse lines that they’re lending off of everything’s done in house and they keep complete control of the underwriting and processing side of things. And with us, for instance, I mean we’re again licensed everywhere except for New York. And we’re an in-house direct lender in the conventional and nonconventional space to where we underwrite fund and securitize and sell loans directly to Fannie, Freddy and Jenny for FHA and VA loans. And then we have nine relationships set up now on the secondary market for non-conventional financing for loans like the DSCR loan, the business bank statement loan, the asset qualifier, fix and flip money, bridge money, that kind of stuff.

Jeff:
So where the difference lies is just speed. A lot of times where the broker, not all brokers, a lot of brokers are moving quickly, but I know some, especially in the non-conventional space are taking 30 days on D SCRs. And that seems to be the norm because there’s larger lenders out there that they’re brokering these two that work at their own speed, and you just don’t have the same control on the broker side that you do on the non-conventional side. The trade-off is sometimes you can find brokers that will do loan at a reduced cost because their overhead may be a little bit lower than some of the direct lenders. So just looking at both sides, what I would say is get everything in writing. I mean, no matter who you’re talking to, you need to have a complete loan estimate, not just an email saying whatever the rate is and what the closing costs are. You need to detailed breakdown of what is being charged and then taking a look to make sure that everything is there accordingly. Because a lot of times, lenders, brokers, and direct lenders, we’re all guilty of it will omit certain things or in order to make that bottom line look a little bit better, because we’re in a market right now where people are getting very competitive and having to, some people are cutting corners, some people are at that point of desperation where they’re falling back into that bait and switch style business.

Tony:
Jeff, you mentioned something that I think a lot of Ricks may not be familiar with, but you said, Hey, we underwrite the deals in house, we securitize it, we close on that property, and then we sell those loans to Fannie Freddie or maybe some other, you said there’s nine other kind of institutions you’re working with. What exactly does that mean for a rookie audience? What do you mean when you say you’re selling it to Fannie or Freddie? Walk us through what that process looks

Jeff:
Like. Yeah, so great question. On the conventional side, all of the loans that we’re doing are going to either Fannie Freddy or Jenny for FHA and VA loans, and they’re the ones guaranteeing the loans. We fund them, we’re servicing them. And so that’s the way it’s set up on that side. On the nonconventional side, we have pools of money. There’s different investors out there that lend in certain spaces that have different risk appetites where let’s just say for instance, one lender or one investor pool in the secondary market may like short-term rental dscr at 75 or 80% loan to value. Others, they may have a lower risk tolerance. So the big difference between the two sides is on the conventional and the government side. So FHA and va, it’s very black and white. The guidelines are the guidelines, and there’s no exceptions. It’s very rigid. On the non-conventional side, it really is the land of gray where we can get exceptions. The goalposts are constantly moving depending on what the market’s doing. I mean, we go into a period we just did where we had a couple of bad reports. All of a sudden guidelines are starting to go the wrong way again and tighten up, and then we will see in another few weeks if things start opening back up. And it’s the constant ebbs and flows of that side in comparison to the conventional side, which is run by the government.

Ashley:
So Jeff, what if conventional doesn’t work and what can you tell us about non-conventional loan products and relationships there with your lender?

Jeff:
Well, on the conventional side, we all hit our limit at some point. I mean, you can do up to 10 finance properties per person as long as you can qualify on your own. And there are times where people will, clients will hit their max DTI or you get to a point where it may make more sense to start looking at non-conventional products instead of having to document more money on your taxes to get to those last few properties and give more to the IRS. So when we’re looking at the non-conventional side with these products, I mean we have a number of different products and this side that allow for non-traditional underwrites. So like the DSCR loan, for all of your listeners that may not know it, it’s debt service coverage ratio. It’s a mouthful. It doesn’t roll off your tongue, and it’s just a fancy acronym for does the property cash flow.

Jeff:
What we’re doing is we’re looking at the property as a business, we’re looking at the cashflow analysis of the property. We’re not looking at your debt to income ratio, we’re not looking at your employment, your income or anything like that. We’re just solely looking at the property. And the way that we do our analysis is we look to see what the forecasted rent is of the property and whether or not that covers the all in principal interest, taxes, insurance, and HOAs. If are the rent covers, all of that. Then you have a cash flowing property. Right now it’s between 15 and 20% down on those products. We’ve seen the 15% down option make an appearance again, it’s finally come, I mean it disappeared after March of 2022 and over the last 45 days or so, it’s starting to come back on a very limited basis, is a great leading indicator of things to come.

Jeff:
I mean, we can see that we’re coming out of this, the appetite for risk on the secondary market is coming back and it’s just a matter of time before we’re able to do those on a more consistent basis. But for right now, most properties are qualifying at that 20% down level on the DSCR side. And then alternatively, I don’t want to get too deep in the weeds on guidelines and stuff like that, but there are other programs on the non-conventional side, for instance, like the business bank statement loan. This is the product that is the workaround for business owners. I mean, when you run a business, one of the big benefits is you get to write everything off and pay very little in taxes. The downside of the double-edged sword is it doesn’t always put you in the best position to qualify for conventional financing.

Jeff:
So this is the workaround where we can look at 12 to 24 months bank statements instead of looking at your tax returns. And what we do is we total up the deposits from the business and use that as your income in lieu of looking at your tax returns. So there’s ways to get creative there. And if for any business owners, this is a great, this is your solution, this is your workaround at conventional financing. And then there’s another one that it doesn’t get a lot of airtime, I don’t hear people talking about it enough. It’s the asset qualifier loan where this is a great program for people that may not be working or are working on a limited basis and may have trouble with their debt to income ratio, but have money in the bank, let’s say have a 401k IRAs, investment accounts, checking, savings, I mean you name it, as long as it’s liquid, we can total everything up.

Jeff:
And there’s a calculation that we can do to convert that into income to where then it in turn turns it into workable income to create a debt to income ratio. And we can use that to supplement. So let’s just say somebody that’s working but has a large 401k, you can still qualify and we can still make it work that way. So there are alternatives out there. And so where I’m going with this, and I think the most important part is, is that if you’ve been declined, if somebody’s telling you no, ask somebody else, go get another opinion on it because a lot of lenders may only be looking at it through a certain lens. There’s a lot of lenders that are just conventional lenders or just non-conventional lenders. And if you’re hearing no, go talk to another lender. And if you’re getting a second no, find a third one.

Jeff:
I mean, just keep going at some point. I mean, you will find a way. I mean, I’m a big believer in whether there’s a will. There’s always a way. So there’s a way to get there as new investors. It’s just a matter of being persistent and being your best, your own best advocate because nobody’s going to figure this out for you. I mean, if this was easy, everybody would be doing it. Everybody would be homeowners, everybody would be real estate investors. And most people, what I’ve seen from my perspective, they stop somewhere between 70 and 90% of the way and they throw in the towel. A lot of times they’ll get to 95 and they’re so close and they just needed to go for the next deal. And they get so frustrated that they may not get the first deal or two or three or five, but they would’ve got the sixth or they would’ve got the 10th.

Jeff:
So you just got to stick with it. And especially when we’re in a market like this, I mean, this is one of the most challenging markets that we’ve seen, but on the other side, it’s creating more opportunities right now than we’ve seen in a very long time because there’s so many people that are stuck on the sidelines because they either can’t qualify because rates have gone up and they’ve been squeezed out or they’ve been watching too much news and they still think that the real estate market’s going to implode. But what we see coming is as rates do start coming down, this isn’t going to get any easier. I mean, when rates come down, we’re going to see the demand side and really spike property values moving up again. And we’re going to be at a similar situation that we experienced from 2020 through 2022, albeit probably a little bit different because the rates probably aren’t going to get that low again, but we’ll still see that same supply and demand imbalance. And we’ve already seen leading indicators of this at the beginning.

Tony:
And Jeff, I know you don’t have a crystal ball, but I’m sure, and this is more of a timely question, but everyone’s probably wondering, where are rates at today? If you were to write a loan today, what are the current rates? And then where do you think they’ll be by the end of the year? Are they going up? Are they going down? Are we holding steady? Give us your best prediction.

Jeff:
Tony, I’ve been wrong about this a few times over the last couple of years. So I mean, it’s honestly like throwing darts at a board. And so we’re back up in the mid seventies again, and we had a couple of bad reports that came out recently, and it’s becoming more and more apparent that inflation is not going anywhere. I mean, it’s sparse, stickier than we’d all like. The Fed was overly optimistic. So Wall Street’s been overly optimistic, and the Fed is really taking it report by report. I mean, they’ve done a great job of implementing this policy of strategic ambiguity where they’re trying to keep us on our toes. They don’t know. I mean, they are waiting for the next report to come out to make a decision, and they don’t want to commit one way or the other because they don’t want to make the same mistakes as the past and end up in a situation like the seventies and the eighties again.

Jeff:
So as far as where I think things are going to go, I think given that we’re in an election year, I stay out of politics, you’re not going to, this is as far as I’ll go with this, but it’s something that we have to take into consideration because we are in an election year this year. The Fed has really no reason at this point to start lowering rates fast. Because when we go into periods where rates come down quickly, it’s because we’re experiencing problems with the economy or something’s going on that gives them reason to start stimulating the economy. Right now, the economy is going strong, GDPs up all the numbers are coming out strong and then throwing inflation, the mix, if they were to start lowering rates quickly at this point, they’d have the appearance of trying to influence a selection, which is the last thing that they want.

Jeff:
They don’t want the optics of that. So I think they’ll probably throw us a bone toward the end of the year and maybe lower the Fed funds rate a quarter or a half before the election, or maybe a quarter before. But all signs are pointing toward more than likely no rate reductions. The summer, we may see one in September, but keep in mind this could all change on a dime. This could change tomorrow. This could change next month. I mean, if something comes out of left field or we start seeing bigger issues on the commercial side or something happens, the war starts to expand. I mean, there are things that could occur that could change this forecasting, but if everything stays constant, the trajectory that we’re currently on, we’re going to be in this rate range probably from the high sixes to maybe mid to high sevens for the rest of this year, at least going through summer into Q4 of next year or the Q4 of this year.

Ashley:
Well, Jeff, no matter what you say, if you keep saying the same thing, eventually one year you’ll be right. And then for the rest of your life, you get to say, I predicted interest rates in 2024, so buy my course.

Jeff:
Well, no, I’m not big into trying to make predictions and you’re really not going to start seeing me do that at any point in the future. But as far as coming back saying I was right, but I do think though, to what you just said, I think we probably will see rates come down in next year. I think at least a meaningful decline next year unless something changes this year. And it’ll be interesting looking back at the last couple of years at the short-term rental summit, their Fannie Mae was coming out thinking we were going to be at four and a half by the end of the year. It was crazy. I mean, the optimism was just, it was incredible how optimistic people were during that time period that when inflation came down, rates were going to come down and everything was going to be normal again. And unfortunately, that just did not occur. And it, it’s been an interesting evolution in a period, a very unique period in time that we’ve never experienced. I mean, nobody knows for certain because there’s never been anything like this that’s happened before.

Ashley:
Here’s my little piece of parting advice for rookie listeners that are contemplating their first deal, if they should wait till next year for interest rates, maybe go down, as Jeff had said, interest rates go down, prices go up. If you can find a deal right now with what interest rates are at and the deal works, the number works, you’re still going to be cash flowing. It works for you. Buy the property, and if rates go down, you can always refinance with that lower rate, or you can sell the property for more money than you bought it for, since it’s probably going to be worth more because lower interest rates drive the prices up. So take that little bit of parting advice to ease your mind that you’re not getting a 2% interest rate like Tony has on all of his properties. It’s okay.

Jeff:
Those days, unfortunately, are in the rear view mirror. And personally, I hope we never see rates that low again, because I think we will have much bigger problems with our economy if we do. And I think going forward, we’re probably going to hit a more normalized rate range of maybe somewhere between the mid to low or mid to high fours to 6%, somewhere in that range is probably where it’s going to settle until we hit the next recession. Whatever that looks like later down the road, because ultimately we will hit another one. It’s just a matter of when, not if.

Ashley:
Well, Jeff, thank you so much for taking the time to come on today and educate us about loan products. We really appreciate it. You gave us lots to think about and lots of great advice when trying to find the right loan product for us. So thank you and all of our rookie listeners. We hope you guys are really starting to get comfortable and confident with shopping for loan products and understanding the loan process. So remember, this is only part two. If you haven’t listened to part one yet, please go back. And then we will also be having a part three. So make sure you check out our next episode on fundamentals of Funding, where you can get into the private lending space and the importance of building banking relationships to fund your deals. You can also go to biggerpockets.com/lender Finder to find more information and resources on the lending process. And Jeff is also featured in the Lender Finder, so you can connect with him. We will also have all of his information in the show description if you’re watching on YouTube, or you can go to the show notes in your favorite podcast platform. Thank you guys so much for listening. I’m Ashley. He’s Tony, and we’ll see you guys next time.