If you’re an investor and you’re worried about interest rates, and don’t have a ton of cash, what products are out there for financing your purchase?
On today’s episode, Clint Coons of Anderson Business Advisors talks to Rick Floyd, Executive Vice President of Homebridge Financial Services. Rick explains some of the basics that you’ll find in the agency space, such as the typical Fannie/Freddie guidelines, but there are also options out there for investors such as the non-qualified mortgage that has very different requirements and doesn’t carry some of the limits and restrictions you may find in the Fannie/Freddie underwriting.
- Background on Homebridge Financial
- The traditional Fannie and Freddie guidelines
- Avoid common mistakes investors make – talk with your advisor, and make sure they are looking at your ‘big picture’
- How important is ‘seasoning’ of cash – it should be able to be sourced
- Portfolio loans use Fannie and Freddie guidelines
- Non-qualified mortgages – qualifying, terms, cap limits, rates, and other details
- HELOCs- only on primary residences, not on investment properties
- What does the next year look like for investors? Lack of inventory is the biggest problem
- One last question -nonQM property transfers- it’s not an issue
Full Episode Transcript:
Clint: What’s up everyone? Hey, it’s Clint Coons here. In this segment, what I wanted to talk about was lending because we know how difficult it is many times when interest rates go up. If you’re an investor, you’re struggling, trying to figure out how to put that deal together, and where that money’s going to come from, well, that could be a problem to hold us back with our real estate investing.... Read Full Transcript
What I thought I would do with this episode is bring on someone who is an expert in their field that has been in the lending business and knows how to work with investors. I reached out to someone who we actually use here at Anderson. We make them available to one of our preferred providers when it comes to lending and we recommend that our investor clients check out their products and work with them as far as putting their deals together.
That person that I’ll be bringing on right now is Rick Floyd, the Executive Vice President of HomeBridge Financial Services. Rick, are you here?
Rick: Yeah, I am Clint. I’m glad to be with you today. Thank you.
Clint: Thanks for coming on. Owning a lending company and starting all that up has got to be kind of interesting. Could you tell us a little bit of background on how you got to where you’re at?
Rick: Yeah, absolutely. It’s a pleasure to be here. Homebridge Financial Services today, we’re an independent mortgage lender. We employ about 2400 associates across the country. We actually formed HomeBridge all the way back in 2009 right after the real estate mortgage meltdown. We felt like it was a golden opportunity to continue to fulfill the American dream. We put it together in 2009 and we’ve been very fortunate to grow through the years. I’ve been in this mortgage space for about 29 years.
Clint: Great. You have quite a bit of experience which is phenomenal because I’m going to be asking you some questions that I get all the time from my viewers and listeners about financing. I would say it’s a hot topic because for many people you don’t have tons of cash and you’re going to have to borrow money. Setting yourself up the right way, knowing what you need to be doing before you go in to apply for that loan is so important and also knowing the products as you and I have discussed prior to us coming on this episode.
Just to start off, when it comes to lending, if I was going to walk in, I’m a real estate investor and I’m going through the traditional route. We’ll talk about non-QM here in a little bit. Most loans for real estate investors, they’re going to be underwritten with Freddie Fannie guidelines, is that pretty consistent?
Rick: Yeah, that is correct. Especially, in the agency space. It will be your typical Fannie Freddie guidelines unless it’s in the jumbo world which also is dollar amounts different by state across the country.
Clint: If I came in and I applied for that loan, one of the things that I tell people is that if you have existing rental properties, that depending on where is your tax return, Freddie Fannie will force you to hold back a certain amount of income.
Rick: Yeah, obviously. There are lots of different components of their guideline. If you currently have a portfolio of investment properties, […] you’re limited to the number that you can finance as you and I have talked about earlier.
Also, there are different caveats to how much income you could show, whether you’re a W-2 or you’re self-employed. Again, it’s just such a key to make sure to your point, Clint, that you got all your ducks lined up in a row and you clearly understand.
No matter which lender you go to, you need to make sure you have somebody that clearly looks at your whole picture of not what you’re just trying to do now, but what you’re looking to do in the future as well, so that those deals can be structured not just for now, but your goals and what you’re looking to do down the road when you’re looking to sell some, buy more, and so forth. There are lots of different guidelines inside the Fannie and Freddie world.
Clint: If I was going to come in, I was going to be using a traditional broker and go through that standard process where it’s Freddie Fannie, what are some of the common mistakes that you see real estate investors make when they’re applying for a loan?
Rick: Probably the biggest mistakes, obviously, you got to know how you’re looking to structure it and what terms you’re basically looking for. I would say some of the pitfalls to stay away from is to talk through with your lender what you’re looking to first before you apply and let he or she guide you as to—that you’re not going to disclose everything and be forthright, but they can talk you through to make sure that that’s truly the route you need to go.
In today’s environment, pre-COVID, we had all the guidelines that were tight, tight, tight during COVID. Some of those still exist even though a lot of them have been relinquished especially in the self-employed arena. It’s just the key to make sure that you talk through, I know I’m repeating that, what’s the route you want to go because the Fannie and Freddie and the agency route may not be the route that you want to go because there are plenty of other options for you today.
If you’ve got cash on hand, you got good LTV, good FICO scores, obviously your Fannie Freddie is the route to go if you meet all of those components because your interest rates will be lower going that route. They’ve also added, this is more of a second home which I know we’re talking about investors here. But Fannie and Freddie have a lot of add-ons to the second home arena, so you just got to be careful to watch. Make sure you ask your lender what are add-ons for the different types of investment properties and so forth.
Clint: When you’re setting yourself up before you apply for a loan, how important on the investment side is seasoning of cash for that down payment for qualifying?
Rick: Seasoning, Clint, is not as important as being able to validate where that cash came from if it’s new cash. If it’s been sitting in your account for a lengthy period of time, not an issue. But if you just moved $100,000 into this bank account or that, we have a lot of our clients that are looking to buy properties. They’re taking out HELOCs on their existing primary residence in order to help cash flow investment properties that they’re buying as well. It’s not critical, but it has to sit there for a period of time. You just got to be able to source it.
Clint: Showing them where it came from is what’s important? One of our clients will set up a limited liability company so they have an LLC and they’ll park all their cash in. That’s what I do. When I want to buy a property, I’ll distribute the cash, transfer it from my LLC account into my personal account. And I run into problems before with lenders where I had anticipated finding this deal and then they’ll see that transfer of cash. They go, wait a minute, where did that come from?
They want to trace it all the way back up to the LLC. If they see distributions coming into the LLC, they really start sniffing around and digging into my LLC going, where did that money come from, and I have to explain to them, those are the businesses that I hold and those are distributions.
Rick: Again, as you know, each lender can be a little different in their interpretation of the rules that may not be just clearly black and white. I would just tell you, at HomeBridge, we do a lot of variations of different types of businesses and deal with all types of walks of life. I can’t say that issue wouldn’t take place here, but as long as you can source it back, we’re not going to dig into things just to create questions just to be asking questions.
Clint: Got it. Why does it seem like whenever you’re using these traditional products, the Fannie Freddie stuff, why are there so many hoops that I have to jump through to get these loans through? Is that because you’re selling them?
Rick: Well, that’s because most lenders sell the loans to Fannie and Freddie and/or they put them into a security. You just got to make sure that—in our lending business sometimes think that the agencies have become. They’re dotting the I’s and crossing the T’s are more important than the quality of the borrower. There’s a difference as to whether you service your loans like we do.
It’s not to say that we want to make bad loans to put in our servicing portfolio. But maybe every single I doesn’t have to be dotted and T crossed when a lender services and creates a portfolio of loans versus those that sell direct to Fannie and Freddie.
Clint: Is that a question that someone should ask if they’re going to work with someone? Is this going to be a portfolio alone?
Rick: Yes. Absolutely. Great question. Great point that I brought up a while ago. That’s a great question to ask your lender. Yes.
Clint: If say for instance I came to you and I asked that question, you said, we’ll probably trace a portfolio loan. Would you then still use Freddie Fannie guidelines or are you more open to—
Rick: No, we still use Fannie Freddie guidelines. But again, there are minor T’s and I’s dotted across, that’s where that comes into play. We would still follow the agency guidelines. In case we decide to sell your loan, they know at some point in time. It just gives a little bit more flexibility plan from all the details that you have to follow.
Clint: Got it. What I’m hearing then is that even though you may treat it as a portfolio loan, you still want to keep your options open that if you need to sell that loan to Freddie or Fannie, it comports with their guidelines or underwriting guidelines so they’ll buy it. You want to separately negotiate.
Rick: That is correct. Absolutely. You hit the nail on the head. If you’ve got a solid bar or lots of cash, low LTVs, it gives you some flexibility.
Clint: Okay. I’ve often told investors, hey, the Freddie Fannie route, most people end up going that route because they don’t know anything else or if there are any other ways to put deals together. As you and I were talking about beforehand, the non-qualified mortgage route is another door that someone could walk through. Can you explain what a non-qualified mortgage is?
Rick: Yeah, absolutely. Non-qualified mortgages obviously, it’s not an agency loan. In the industry and at HomeBridge, we do a lot of non-QM because you got a 12-month bank statement, you got a 24-month bank statement, you got an investor cash flow. There are all types of loans, investor loans that don’t meet the Fannie Freddie guidelines. Investors have an appetite for them.
If you’re self-employed, you just got 12 months of bank statements, it’s best to analyze your cash flow looking from your wherewithal to make the payments. Perhaps your credit is examined as well. But that’s a huge space, especially in the investor community.
We do a lot of that investor cash flow. If you own 10 properties, instead of underwriting you on your tax returns and so forth, we’re underwriting the cash flow of those properties. I would highly recommend that any of your clients that are either self-employed or have different structures, have a lot of K1s or just different flows of cash in their businesses, to definitely talk to their lenders about the non-qualified mortgage or also known as non-QM.
Your rate is going to be a little higher, but that’s just to offset the risk of not underwriting you to a fine tooth comb so to speak. It’s a great, great product for your investors that are buying residential properties.
Clint: Let’s break this down. With the bank statements, what are you looking for there on the bank statements?
Rick: Cash flow. Just make sure that you’ve got enough cash flow to sustain your debt. Again, it’s 12 months, 24 months. If you need 24 months to look at the bigger picture, you get a lower rate if you go longer and you can prove that you’ve got the cash flow. If you’ve got $20,000 flowing in and out of your account each month, you can easily say that you’ve got the cash flow to make your payments on your mortgage. Then the investor cash flow is obviously the properties.
Clint: If an investor had a limited liability company set up or land trusts, entities that we typically recommend that investors create for asset protection purposes. When you’re looking at the bank account, would you just take the LLC’s bank account and judge a cash flow if I can show you that I’m the owner of that LLC? Is that how that would work?
Rick: Yes. LLCs are not a problem in the non-QM space. The LLC cash flow limits liabilities.
Clint: When you talk about the rental income, if you can show the income coming in as we were talking about touching on the issues with the Freddie Fannie stuff where they have a holdback, my understanding is 25%, I’ve seen 30% as far as rents will not be applied for vacancy purposes. When you’re going non-QM, do they do the same thing or do you get 100%?
Rick: One hundred percent. On that investor cash flow, it’s 100%.
Clint: Okay. When we’re doing that non-QM then, does that also allow me to close any limited liability company?
Rick: Yes. On the non-QM side, you can close in an LLC. That is correct.
Clint: With those non-QMs, do I have to give a personal guarantee or are these asset-based loans?
Rick: Well, there are programs that are asset-based, but these non-QMs, you’re personal guarantee because the property is your collateral and you’re personally guaranteeing it as well. Now, there are asset-type loans. We don’t do many of those here at HomeBridge, but they do exist in the marketplace.
Clint: Got it. How important is my personal credit score then when I’m using a non-QM loan?
Rick: Always. They will take a lower FICO, but the hits to your pricing are pretty dramatic.
Clint: The other thing too as you and I were discussing with Freddie Fannie, they allow each borrower to acquire 10 properties. I see this a lot. A husband and wife, they both go on a few of the loans together. If they went on four loans and they realize when I start talking to them, hey, you just took four potential opportunities away from yourself if you’re going to stick working with the Freddie Fannie market because each of you can only be on 10 loans total. Whereas with non-QM, is that even a consideration?
Rick: No, sir. Not an issue. That same 10 cap does not apply in the non-QM space.
Clint: If it’s not in the non-QM space, where is the money coming from?
Rick: A lot of investors. There are hedge funds that operate in the non-QM space. At HomeBridge, we pull seven different investors. Whether it’s Goldman Sachs, Starwood, or a lot of them. We pulled those together, created our guidelines that they would all buy. […] exceptions to that. We go to those guys for that. But it’s investor’s money, it’s hedge fund monies just looking to get a return on their monies. Goldman Sachs is a big player. Angel Oak and Starwood, just different investors.
Clint: Can you give us an idea of what the typical terms are for a loan like this?
Rick: In today’s environment, Clint, you’re in the high sevens. It depends. If you’ve got a low LTV and a high FICO score, you’ll still be in the mid-sixes. But again, if you’re looking to finance at a high LTV or you got under 700 FICO score, it’s really going to get bumped up into the sevens. Most of the non-QM business in today’s environment is in that low seven or mid-seven range. But you’re paying to have different options for your financing.
Clint: Got it. With the terms of the loan, is it any different than Freddie Fannie, are there prepayment penalty clauses in there?
Rick: No. You still do 15, 20, 30. There are no prepayment penalties. Some investors will write with a prepayment penalty, but we do not. They’re your 15, 20, 25, 30-year terms with no prepayment penalties on ours. Obviously, some lenders, they offer them.
Clint: Typically, how much do I need down on an investment loan then for this type of product?
Rick: If you want the best rate and so forth, you’re probably needing at least 30% plus. But you don’t have to. I mean you could do it with the lowest 10% down, but you’re going to pay for the risks.
Clint: Yeah, because the interest rate is going to go up based upon the risk the lender is taking on, and that is dependent upon you as the borrower, how much money you’re bringing to the table, what your credit score is, things like that.
Rick: That is correct.
Clint: Here’s what I’m wondering. Let’s assume that I bought a property on contract with a seller. The seller’s carrying the note and the deal was that in three years, I would finance that seller out. I come to you and I say listen, I got this property, I bought it for $150,000. It’s now worth $200,000, and all I need to do is cash out the seller who’s carrying the note against the property. Would that qualify under a non-QM type of deal transaction?
Rick: To make sure I’m clear, so the seller is holding the note. So you’re buying it from John Doe and John Doe is going to take back the lien, so he’s going to be your lienholder?
Rick: Now, you want to finance that property to pay off John Doe?
Rick: That’s a great question. In my experience, I’m going to say yes, we could qualify that under the non-QM space.
Clint: There’s equity in that property, do I need to come up with anything in a situation like that? If I negotiate a price for a piece of property or house and there’s built-in equity what it appraises at. Let’s say it appraises for 25% higher than the purchase price, would that count then towards my down or do they still look for it saying, hey, even though you got equity, it’s great but we still want to see 20% down to get those lower rates?
Rick: That built-in equity there can be used for your down payment.
Clint: Great. They could use that built-in equity because I know investors have properties like that that they found. And if it’s a cash flow issue, bring the property to the equity.
Rick: Yeah, absolutely.
Clint: Okay. HELOCs, are you doing any on investment properties?
Rick: No. We’re doing it today only on primary residence, not on any investment properties.
Clint: Why don’t they do it among investment properties?
Rick: Just risk. That’s not to say that some investors may not be out there, I can’t speak for everybody out there. Today at HomeBridge, we do only primary residence.
Clint: Okay. If I had an investment property with a fair market value $600,000, $400,000 in equity, so I owe $200,000 to Wells Fargo. If I came to you, could I do a cash out refi on that deal and maybe pull $250,000?
Rick: Yes, absolutely. We do cash out refis on investment property all the time. We just don’t do the HELOCs today on us.
Clint: That’s something then for the investor that can’t get the HELOC and has a lot of equity in their rentals to keep expanding their portfolio. The best thing to do then would look at going that route to do cash out refis.
Rick: Yeah, cash out refis. And then you could do those on the non-QM side, the agency side, whichever way the problem best fits their needs and their situation.
Clint: Are you finding most of the investor clients that are coming to you, are they mainly going non-QM now or are they still on the agency side?
Rick: Yes. Most of them are going non-QM just because it’s easier with their cash flows, just the guidelines, and so forth. Paying a little bit higher for it, but it’s just an easier process.
Clint: What is the typical underwriting time for non-QM versus an agency? Is it shorter?
Rick: They’re both, the time frames. In 2020–2021, it’s probably a little bit longer than it is now with volumes down as an industry. They’re 48, 72-hour tops underwriting turn tops.
Clint: With the rising interest rates, where do you see everything going for the investor in the next year or so?
Rick: That is a loaded question. Interest rates are what they are. I mean interest rate is not our biggest challenge today. The biggest challenge today is lack of inventory and rising rates, don’t get me wrong. There’s a big difference between two and three quarters, five and three quarters. But we’ve all seen this roller coaster of interest rates. Lack of inventory is a big impediment to the environment today.
Clint: Rick, you see I was talking to an investor this morning and he asked me the question, what do you think is going to happen with the market right now with home prices and rising interest rates? The price is going to of course possibly fall. Is it going to be something like we saw back in 2008? I had my views, but I’m curious what your views are.
Rick: Personally, Clint, we’re fighting inflation. We’re fighting 8.5% inflation, depending on what they want to do. My personal opinion is that we’re going to see some stabilization in the short near future and that we will not have a relive of 2007, 2008, 2009 during those times.
I don’t think we’re going to see the values fall. My firm belief is that they will plateau here. I don’t think we’re going to continue seeing people paying a couple of hundred thousand asking price on a lot of the stuff. We think rates will find a spot to settle in here, and they’ll get everything under control. I do not see a 2008 on the horizon in our view. I don’t know about you, what your thoughts are. But that’s Rick Floyd’s opinion.
Clint: Yeah, I agree. Different metrics now than it was back then with the way they were writing loans.
Rick: The problem is back then, lending, if you had a pulse, we gave you a loan. We’re trying to make it a little easier, but you still have some hurdles to go through like in ’08 with the […] business.
Clint: Here’s one question I forgot to ask on the non-QM side that I’m curious about, and that has to do with property transfers. Let’s assume that we closed in a Texas LLC and you’re holding the first position on that. If I decided I wanted to move it to a separate LLC, have you ever seen a lender? Would you guys call that no-do, or does that even matter at that point in time since you’re secured against the property?
Rick: It doesn’t. It wouldn’t matter. As long as the payments continue to keep being made and so forth.
Clint: Keep the property insured, pay the taxes, and pay your mortgages.
Rick: Yes. Absolutely. Check all the boxes and then we would not care if you transfer that to your LLC and so forth. Not an issue on our part.
Clint: Rick, it’s been a pleasure speaking with you. What I’m going to do is I’m going to put the contact information for HomeBridge Financial in the show notes. If anybody wants to reach out to you or want to talk about a non-QM product for their investing, hopefully, it will drive up some business for you and allow some investors to get into some properties.
Rick: Absolutely. I applaud you for the services that you offer to your clients. I greatly appreciate your time and any questions along the way, don’t ever hesitate to reach out. We appreciate the partnership.
Clint: Thanks, Rick.
Rick: Thanks, Clint. Take care.