Hey, simple passive cashflow listeners. Today, we are going to be doing an update on what’s happening in the lending environment. Going to talk through the key factors in getting the loan debt to income credit score. Other tips for you guys picking up your primary residence or your remote rental property.
Joining me today Benson Pang.
Hey lane. How are you?
Good. It’s always a funny thing in YouTube world or podcasts world when everybody says something lame oh, I’m walking my friend Benson and that’s a code word for yeah, I just met and I barely had a two minute conversation, but here I actually know Benson.
He’s actually a pretty good friend of mine. Him and his wife run their mortgage lending company nestmade.com. So Benson and Mimi, they lend out of California, but they can lend out of multiple states, but they’re also in the family office Ohana group. You guys can learn more about that at simplepassivecastle.com/journey.
It goes in with our whole, invest and work with people, you trust. I thought it’d be Benson on who does this for a living to break down, what’s been happening with the lending environment and some of these key items to be on the lookout for, if you guys are looking out for your next real estate loan.
Generally, before we dive into some of the numbers how is lending today? I know during the pandemic things were pretty crazy for you guys with refinance, right?
Yeah. Back in March to July there was so much uncertainty last year and a lot of lenders pulled out of lending completely.
We see debt to income ratio, like being pushed lower and lower. There’s margin compression. There’s all kinds of things going on in the lending world. I think the biggest thing is the non QM stuff, like people who have less than perfect tax return, they went like they got nowhere to go because they’re all gone.
Until most recently they all trickle back. We have the last couple of months, we signed up with a lot of new lenders that are doing a lot of the non QM stuff that jumble loans and non QM are back basically.
So we’re going to be going through, the kind of a chart of what are the things that you guys need to do to qualify for the best rate, but to outline this for you guys, listening in podcast form we’re going to be talking about two things here, right?
Owner occupied properties, your primary residence, dream houses for a lot of you guys and the non-owner occupied properties. The biggest one that people look at first is to qualify as debt to income ratio. Maybe explain what that is and what is the percentage.
There’s a lot of talks about what the debt to income ratio needs to be. Before we get into that, debt to income ratio is debt divided by your total gross income before tax, right? So your debt could be your PITI, principal, interest tax and insurance, HOA mortgage insurance all added together plus any of your credit card payments, not balances payments, your student loan payments, and also your car payment all bunch up together.
Let’s say it’s $5,000 and you and your spouse make a $10,000. That’s 50% debt to income ratio. Okay. Right now, if you have a great credit score, like 740 or higher you should be able to qualify at 50% debt to income ratio. In some cases where the credit score is lowered or your LTV or loan to value ratio is higher.
Meaning you put 5- 10% down that might get pushed down to 45% or even 43% to get a DU approve eligible.
Now a lot of people listening are engineers. You are an ex engineer yourself too. Do you see any like mistakes that the weekend spreadsheet junkie that makes their own debt to income calculations, and then you guys run it.
Are there any kind of common mistakes you see the folks at home banking and they’re calculating this stuff and then you get all upset when you’re there like I’m 51%, right? How’d you get 47%?
Especially the ones who already own one or two investment property. A lot of people think that they can just use a gross rental income. A lot of times it’s really if you own a property for a year or two, we actually go off of your schedule E and there’s a very specific calculation. It’s really not that hard. It’s your net income, you add back your taxes, insurance and mortgage interest.
And that’s your total gross income. And then you subtract your actual expenses. So super easy, but people, it’s actually, even on the Fannie Mae website guidelines, they’ll teach you how to do it. If not, you guys can reach out to me, I’ll let you know how to make that work.
And the second thing is a lot of people think that a student loans, just because it’s zero payment, a lot of people are on deferment or forbearance on their student loan. We still have to assume a number, cause eventually you’re gonna have to start paying again. So Fannie Mae and Freddie Mac, they each have their own calculation.
One is half a percent and one is 1%. Personally, I like to use the 1% to be more conservative.
You need to be able to show what bank statements or W2 statements to show this.
So for W2 employees, we asked for one year W2 just to show the history. So you need two years of working history. Now with that same company and student, you working as a student counts too. So if you graduated from college and now you got a $200,000 engineering job, we can use that $200,000 right away.
And what about like you’re a business owner, you don’t have those clean.
So if you’re a business owner, typically we asked for two years of self-employed history and we look at two years of tax returns. There are times we only ask for one year of tax return when you have the business for five years or more.
And then just, say your debt to income is all right. Again, what are the kind of the credit score ranges that you’re looking for?
So when you’re looking at credit score, a credit score is going to do two things for you. One is if you’re eligible for that program or not. So some programs have a minimum of 660 credit score, 620 credit score it depends on what you’re trying to qualify for. Number two is it’s credit score affects the risk of your loan and the higher the risk the higher the interest rate or pricing for that loan. In fact, a lot of people, a lot of us get conventional loans, so if you were to Google, Fannie Mae, LLP loan level price adjustments. That’s actually where you see all the price adjustments. So if you have a 740 credit score, will typically give you the best interest rate 720, 700 and then 680 so it goes up and down and 20 points increment.
Maybe if you can help demystify this, I still am confused when you get your rate sheet, right? Like you might have a lower rate, that’s competitive with other folks, but you also have to look at the fees. That’s how lenders make money on loans and that’s how they keep in business, right?
Yeah, absolutely. Man, who doesn’t want a 1.8, 7, 5, 15 year fakes, no point no fee, right? It’s all over the billboard. But you’re driving 60 miles down the freeway and you’re looking at the billboard and actually the fine prints are so small. There’s no way you can see the fine print.
But basically you gotta look at your situation is, and then you needed to have someone to help you break it down where the points of the loan, the lender fees, and also do they have other junk fees or appraisal fees?
You gotta be put it side by side, a lot of borrowers that when they come up to me, they’re like, oh, what’s your APR? Like personally, I’m not getting a credit card. So I don’t really look at the APR, I actually looked down into all the nitty gritty numbers and put it side by side and match it up.
But it makes it hard, you go on LinkedIn, you typed in the word lender and there’s like instilling in mom-and-pop daisy chain lenders, that may originate one or two loans a year, one for themself, one for their bop, their fees are all over the place.
I think that’s in every field, right? Not just in lending and real estate, there are real estate agents good, bad, and engineers, there are good engineers, bad engineering. So I think in lending you really want to be aligned with let’s think about it for a second here.
You’re going into contract you, your lender and your real estate agent, and then you three against a listing agent, the title officer, the escrow officer and the seller they’re all picked by the seller. You need to be aligned with the best of the best. You need a really good real estate agent to represent you. You need a really good lender to be protecting you as well.
It’s the intangibles, right? Can you close or are they going to say what they’re going to do? Or are they just going to bait and switch on.
Exactly. There are lenders out there. I’m not gonna say who, but you just gotta be careful who you’re aligned yourself with and you want to be aligned with someone who has a track record and have your best interests in heart.
Is it similar a lot of people do the infinite banking? In the beginning, you don’t know what kind of like rates and fees you’re going to get like you gotta unfortunately get that, have that nurse come to your house and you get your physical first. Is it the same thing with the lending? They’ve got to run your profile for a couple of weeks and then you get to that point where you see the whole picture?
The good part about lending is there’s no blood draw or lab work to run your credit to run your interest rate, we really only need four or five items, right?
Your credit score, what you think your credit score is and obviously if you’re saying you’re 740, we run it at 720, that would be different in interest rate or pricing. So your credit score, how much down payment and then are you buying a single family or condo?
Is it owner occupied or not and your zip code? Like those few things will basically give me enough information to run a quote for you. And that quote should be able to stick with the whole transaction throughout.
Let’s get to some of the problems you’re seeing through transactions. Maybe we’ll break it down on owner occupied and non-owner occupied too. But like the first one is when I was buying a lot of these rental properties, of course I was using my own money. My parents never give me anything and nobody gives me gifts. But some people when they’re buying their primary residence, shoot, what kind of 20 something year old kid can afford $200,000- $300,000 down payment.
All these guys are getting it from their parents. What’s the best practice is there to work that in?
A lot of people when they come to me obviously there’s some gifts involved. But for gift letters for the most part, conventional loans are pretty easy. They make it really easy for us lenders and also the borrowers. I typically suggest there are two ways of sending money into escrow. You can have the donor write a check and deposit in the borrower’s account, but you would need a lot of documentation showing how the money is deposited.
We’ll ask for a canceled check or check image and the transaction history, sometimes it takes now three or four days for it to clear. So depends on where you are in the contract. You might not have that luxury. The cleanest way, I always tell people is to have the donor and wired directly into the escrow’s account.
So this way, there is a receipt and there’s no way that money is going wrong anywhere. But for FHA loans do know that, we will ask for the sourcing of the donors funds. So meaning I will ask for two months of bank statements from the donor.
I’m trying to sharp shoot this. If I get a random check from my friend or my parents two and a half months prior to when I throw this money into escrow does that nobody checks. Or there’s nothing I need to write that this was my money?
In the real estate industry, and I hear a lot of real estate agents would say oh, you need to have two months of bank statements, clean bank statements or seasoned funds.
Really that’s a myth. But it really depends on what the deposit is for. We call them large deposits. So large deposits definition is basically any deposit. That’s more than 50% of the total gross income use on the loan application. So let’s say if you and your wife combined $10,000 gross rent knowing gross income on the loan application.
So anything higher than $5,000 deposit into your account. We just have to know what it is and why is it deposited? We just want to make sure it’s not, you’re not loaning a $5,000 to go buy this house and now you have to pay it back and we need to add it to your debt to income.
Or it being a gift or cannot be a gift?
And we just need a documented, source and explain.
I just got it from my block 5 man.
Or crypto deposited from Coinbase. We can use crypto as down payment.
I’ve got this other, like one guy it wasn’t he wasn’t annoying, but the bank was being really annoying. They’re like, oh, we see her in these private placements a nd to make sure like LPs don’t co-sign on the debt, they’re passive investors. But they’re asking all these questions. Any thoughts on that other than finding a new lender?
He can explain all you want but if met with an underwriter that won’t let go sometimes it’s just easier for you to change lenders, to someone who can get that scenario ran by their underwriter. And if you get the, okay, then resubmit that application over there. That’s what we do as brokers.
Sometimes we run into cases like that and lender aid doesn’t work out. So we quickly, we have your application. We it’s so easy for us to go. Go to the second lender, go to the next lender. I can get this done ASAP.
For you guys, this is how the industry is made, right? Like you have lending brokers and you have the people on the, kind of the sales side interacting with you, but there’s a person in the back office.
Maybe it’s an open-ended different company. Whereas the underwriter, now this is where you need to have a good broker or front office person to take your story to them. Now, if you have just some bureaucratic idiot on both ends, you’re going to run into all these types of problems, but you need to have somebody to sell your story to the right way. See, even if you do have a bureaucratic idiot as the underwriter, you can pass all these barriers.
I always tell my clients to give me the full story. I don’t want to have any surprises while we’re in escrow. It’s oh, so you own a house with your parents and you forgot to tell us and we always ask for the full story upfront, then we can know how to what’s going to come our way and how we can prepare you when we submit your file to the underwriter.
And Benson’s a license loan officer so he has no comment on this, but I’ve had clients where they’ve changed jobs the last second and they let it slip on their on email and their lending broker kind of kibosh is the loan. I had to tell my guys as well, if anything like that happens, use the phone.
Yeah. We’ve had loans where we call so a lot of people there are a couple of times where they submitted their pay stubs. We got into escrow, got loan approval and they quit.
They told me that I can quit my job and my wife can quit her job so we can get real soon professional status or some other random tax scheme.
Yeah, I know. We actually do a final, verbal verification of employment three days before you close, meaning you sign documents. A lot of lenders, they wait until that last minute, because if you think about it, Hawaii or California, we close escrow in 21 days, 30 days. It’s very typical, but when we’re in the Midwest, other states they might take 60 or 90 days to close an escrow. Heck their appraisal process is probably two months right now.
There’s appraisals shortage right now. So like in two months, who knows if you’re still going to be employed so they always do a verbal verification of employment right before you close. Sometimes Fannie Mae picked about 10% of loans to audit. So sometimes they will call after the loan is closed to see if you still work there.
It’s okay. If you don’t work there, you just don’t want to make sure they want to make sure that there’s no loan fraud, right?
I think they’re just in the back office, they’re drinking Johnny Walker, red label and trying to screw people over at the very last sec.
We’re talking a lot about like primary owner occupied houses. How does this change for you if you’re buying a rental property?
Non-owner occupied. First of all, if you’re talking about conventional owner, non owner occupied no gift is allowed. No gift is allowed.
At least in the last two months, right?
Yeah. We look at your bank statements and and there shouldn’t be any gifts in the past two months. And if you’re looking to do some DSCR loans and for those who don’t know, DSCR, it’s a debt service coverage ratio.
It’s a terminology that’s often used in the part mint and loan world. So they have it for one to four unit for people who don’t want to show their tax returns. And we base it off of the income of the property that you’re buying to qualify you. And a lot of those programs will allow a gift letter or will allow gifts.
So what is the debt service coverage ratio, the magic number they’re looking for?
One, the magic number is one you can do less than one. You just need to take a higher rate.
That’s actually not hard to hit. Like for the larger apartments. It’s usually like 1.25.
Yeah. So commercial loans Fannie Mae, Freddie Mac the multifamily home loans, they asked for 1.25, and the 1- 4 is private investors so they really only ask for one, or even less than one, depending on the LTV.
And, you’re talking about shopping it to different lenders. Does the Fannie Mae Freddie Mac FHA loans always the best?
Oh always. I would say, I like to look at FHA as a band-aid loan. So if you have some sort of history credit history in the past bankruptcy or your low credit score, FHA is going to be more forgiven because they are backed by the government.
And there’s a huge insurance costs upfront and every month. And then and then people typically who are in an FHA loan, they’re only in there for maybe five years or so. And they’re going to refinance out of it into a conventional loan. That’s what we typically see. And conventional loan has slightly higher interest rates just because I think she has a huge mortgage insurance to hedge against the risk.
Conventional still have a very low interest rate, not as low as FHA. And then after conventional, then it’s going to be your DSCR your non QM loans. So people who can’t prove tax returns, income.
And we’ll get to that non QM loan here in a feature gets you on a future podcast to talk more about that cause that’s something I said selfishly and interested because I don’t make too much money on my taxes. So little screwed for getting loans.
Yeah and there are multiple ways to do it. Yeah. Let’s we should get together again.
So you wanted to talk about the second time home buyer tactics, because I think a lot of your clients are California guys. They see a lot of equity, they got a lot of debt equity and they run up, put it into anotherasset.
Yeah, I think the first question when someone come up to me and say, Hey, I want to buy my next house, my next primary home. Okay, cool. What are you going to do with your first primary home? Are you planning to sell? What are you planning to do? And because of, forums and whatnot, how’s hacking, that next big thing. A lot of people want to rent out their first primary home and buy the second house.
I love giving our guys a hard time, right? Like you already got a house and you want to go buy another one. It’s oh, you already got you two Moderna shots or Pfizer shots and you want to get booster shot. Most of the grill, it hasn’t gotten any, but I don’t know. I just give them a hard time. Just to be fun with them cause they get it.
We have a housing shortage, let’s just sell your first house. I get it. There’s some sentimental value, you want to stay in, you want to rent out your first house is fine. But the question is now a lot of people, they’re like, oh, I don’t want to pay interest so they keep dumping money on their first house, the first mortgage so they can have low interest so you paid in low interest on the low interest rate.
Which is not what you financially want to be doing folks.
Yeah. That would be another podcast. We’re in a super low rate environment. Typically I ask people to just make the minimum payment, whatever your PNI is and tuck away the rest of the money and invest it somewhere else that’s growing faster than 2.8, seven, 5%.
So people who are looking to tap into their equity to buy their next house, because they want to buy their next house next year. I like to tell them to plan ahead. Don’t do a cash out refi right before you’re trying to buy your next primary home because when you sign your loan documents, next time when you sign your loan documents, when you’re signing the deed of trust, look at item number six, I think it’s six.
It’s basically telling you that you’re going to move in that house for a whole year, within the next 60 days and move in that house for a whole year and, Fannie Mae is going to catch you. If you’re not careful and that you’re not staying in that house and have you buy back the loan.
So if you’re planning to do that, do it today, take the cash out, put it in the bank and so next year you’re not violating any rules. You can use that cash to go buy your next primary home.
It’s similar to if you get an owner occupied house with some people. Technically, this is fraud, I believe because you can’t get an owner occupied mortgage then move out right away with the intention of doing that, right? If your employer fires you change jobs involuntarily. I think that’s another thing, you said 12 or something like that, like 12, like you’re signing up for this more occupied government like I’m signing off.
Yeah, because your loan is going to be sold to other investors that think this is your owner occupied house, and with a lower risk, give you a better rate. And now, they’re not buying the investors, not buying what they thought they were buying. They want you to buy it back, buy back that investment, which is your loan.
And, a lot of people. Have success sneaking by but with technology today, you never know, right? They have QC department, they’ll check your Facebook, your LinkedIn, just to make sure you’re staying in that house. They, when you listed on the MLS for rental they see it right away.
They have an alert that says 1, 2, 3, main street is up for lease and they’re like, wait a minute. Buy this house as an owner occupied.
People think that there’s privacy and like they hide behind their Wyoming, like LLCs for supposedly. The government knows everything. Even all you guys are signing on like deals as LLC, as passive investors, the government has your social security numbers on there. They haven’t figured out how to use artificial intelligence very well. If you’ve heard about this offensive, but like they audited like pizza chains, like the small mom and paws who are like, those guys typically stuff, they make a dollar, but in the cash register, put the other in their pocket, do that type of stuff.
But they audited like the number of pizza boxes that the chain was buying. And then they look for discrepancies.
You can’t outsmart these guys. In, in our area, Sam Wu is a really big a Cantonese food joint and he got caught there’s another one in Mama Lou’s just recently got caught at the dumpling house.
They can sit out there and count people walking in yeah. Gallons of canola oil or something like that. I don’t know what they use.
So this next one house hacking. You and I are not, we’re a little older these days but at one time we were both broke engineers. And when we would do stuff like this, but now, married, kids. It’s just not cool to have somebody live in your duplex house, but a lot of you, some of you guys, I dunno, I listened to my podcasts. You guys don’t have money, but you might want to buy a duplex.
Stripe books are called live in one side. Maybe you’re weird like that. Maybe talk us through some of your clients doing this and how that works.
Actually I can talk to you like back when I first started in mortgage or even when I was a poor engineer the goal is always to buy a three unit or four unit as my first house.
I was single back then. I didn’t live in a garage. But like your first house was always the, oh, you get it by the two duplex, a three unit, four unit, and then you can live in one and rent out the other three. But in California, it’s just so hard right now. Do three and a half percent down FHA loan lived there for a couple of years.
And until you save enough to buy your second primary house, which is at that point would be an upgrade because you might be going to a duplex or condo. But you gotta keep in mind when you’re doing house hacked is like, what is your motivation to move from house A to house B? And does it make sense, right?
If you already live in a million dollar house and now you want to go buy a $350,000 house to move into. Just doesn’t make sense unless you are in a retirement age and you’re ready to downsize. Your kids went to college and emptiness or you want to buy a smaller house.
Sure. I think that’s when you go downsized, but for people at uni who are just have kids, if you own a $1 million house, you might be buying a one and a half million dollar housing. House hack it that way. So proving of your motivations, always like the number one thing.
You moving closer to your employer. If your employer is set in San Francisco, why are you buying in Los Angeles? So in that case if your employer allows you to work from home, you might need a letter to say, they allow you to work from home, and now you can buy a house near your parents in LA.
I would probably argue, if you’re under a quarter million, half a million dollars net worth will remote buy properties at cashflow. The house hacking, especially in California, primary market, gambling on appreciation. It would probably go up it’s real estate. All the data’s showing, all the historic. How how long are these primary residence loans taking, compared to the non owner occupied these days?
How long is the application to close? The closing period that, if you’re putting in a low offer on a property, which should you account for these days.
I think we’re averaging about 13 days between application to signing loan documents on all primary home or non-owner occupied.
I got a little this question is why I have a friend. So I have a friend that buys a rental property and there is a repair such as HVAC is broken, or there may need to be repaired the roof, right? Say call it 10 grand of repairs on a $80,000 house. Would it be smart or could he work a deal with the seller for the seller to do that improvement? Fix the roof, improve HVAC and increase the price and that way the buyer can lump all those costs into a loan. Instead of dumping another 10 grand Cash is king. Is this something that you can do legitimately in your loan and close your closing or does it need to be off on the side?
You can definitely do it within the closing inside the contract, if you’re planning to just add it to the purchase price, you should be okay. Just make sure your appraisal comps are going to be. It’s comparable, this house 80,000, going to $90,000 is going to be comparable to other homes being sold that’s $90,000.
What we cannot do is add it to the loan. So if your loan is already $50,000, you want to add 10 grand to it that might not work just because the LTV might be too high for the loan.
But if your appraisals or you got some cushion in your appraisals, You can fix a lot of stuff in, yeah. And as an investor or, people who are listening to this podcast is probably smart enough not to do that. Added to the house and now it’s, the praise value’s too high and you have to come up with the difference anyway.
Just to close out this summary. Primary residences, remote rentals or other, not owner, occupied properties anything think that can you’ve seen clients get hung up on in the closing process that just have people be aware.
Yeah. I think one thing that I would suggest is like taxes. A lot of people they ran out the other unit of their property and not report that tax. I’d say go ahead and report it. I don’t think it’s going to do too much of a difference on as far as how much more income tax you have to pay.
When it comes to applying for a loan it’s going to help you in a long way in the long run.
You want to get your contact information out there if anybody’s looking to get along?
Yeah. Man, you caught me by surprise. I would just go on Yelp and type in NestMade Mortgage and you’ll be able to see us on top.
NestMade.com, thanks Benson for joining us and we’ll see you next time on what I got my personal question for those business owners who can’t qualify for home loans and fit in the box. All right, I’ll talk to you soon.