After our last episode of Ask The Guys, we asked Walter, our email room manager, to rummage through our email inbox and gather up a bunch of listener questions about loans and lending. And he came up with some gems!
So we dialed up our lending brain trust and convened in our Dallas studio to answer your questions about loans and lending.
Behind the microphones and ahead of the yield curve for this episode of The Real Estate Guys™ radio show:
- Your well-capitalized host, Robert Helms
- His living on borrowed time co-host, Russell Gray
- Residential investor lending specialist, Graham Parham
- Commercial lending specialist, Michael Becker
After several years of tight money, it’s nice to be able to talk about getting loans again.
Even better, lenders are beginning to to get more creative in looking for ways to attract new borrowers.
But while that’s good news, it means savvy investors need to stay on top of the ever-evolving underwriting guidelines. That’s why it so important to have one or more mortgage pros on your team.
So when Walter dragged in a bag of emails full of lending questions, we called on our lending gurus, Graham Parham and Michael Becker, to help us answer. In fact, we made them do all the work. 😉
We talk about what happens when you’re fortunate enough to have equity and want to use a cash out refinance to access it for additional investment.
We discover that…from a lending perspective…not all properties are the same.
For example, a condominium might be in great shape…and your credit score and debt-to-income ratios might be amazing…
But if there’s too many renters and not enough owners living in the complex, your condo might be “unwarrantable”.
That means the government subsidized lenders, Fannie Mae and Freddie Mac, don’t want to make the loan.
Bummer. Now you can’t get the cheapest rates.
However, all is not lost. Because while Fannie and Freddie might shun your deal, there’s an emerging group of private money lenders who can probably help you.
Of course, it’s more expensive compared to Fannie and Freddie. But probably better than leaving your equity trapped and idle in a property.
We also talk about HELOCs (Home Equity Lines of Credit). These are nifty tools that allow you to have what is essentially a revolving line of credit against the equity in your property.
For a while…in the wake of the mortgage meltdown…lenders were shutting these credit lines off en masse.
Today, lenders are advertising to attract HELOC borrowers. Happy days are here again!
Of course, we don’t think it’s smart to count on HELOCs for essential liquidity. After all, the lender can shut the line off at will.
But they can be VERY handy tools for tapping equity…and only paying interest when you have the funds drawn. Nice.
One of the issues borrowers are facing is income documentation.
It SEEMS like documenting income is a good idea. After all, who would lend to someone who doesn’t have enough income to make the payments?
BUT…as our good friend Robert Kiyosaki always reminds us…there are three sides of the coin.
In the case of income documentation, most self-employed people are working diligently with their tax advisor to MINIMIZE (legally) the amount of income showing in their tax returns.
But when it comes to borrowing, the lender wants to see LOTS of income.
It used to be that lenders understood this, and would allow a borrower to “state” their income…rather than prove it.
As long as they had good credit, savings, and a legitimate source of income, the lender assumed if the borrower was willing to risk their down payment and credit score, they probably had the means to repay…whether or not the tax returns proved it.
Of course, when real estate got “hot”…and everyone was rushing in and betting on never-ending price appreciation…borrowers and lenders got sloppy. And we all know what happened.
So today, borrowers need to plan ahead. That means preparing your income documentation…including your tax returns…TWO YEARS in advance of your purchase!
Obviously, it’s a REALLY good idea to work closely with your mortgage AND tax advisors.
Of course, if you decide to make the leap to commercial lending (more than 5 residential units or anything non-residential)…it’s the income of the PROPERTY that needs to qualify…and it’s your balance sheet…and not your income statement…that the lenders will be interested in.
There’s another group of people who are somewhat locked out from all the great cheap government subsidized loans. Foreigners. And foreigners have been very interested in buying up U.S. real estate.
Of course, where there’s demand, entrepreneurs (even lenders) will look for ways to create supply. But as you might imagine, those solutions don’t involve government programs.
Still…some leverage…even at higher interest rates…can be better than no leverage.
As we often say, “Do the math and the math will tell you what to do.”
Another question that came up has to do with Fixed Rate versus Adustable Rate…which is best?
The answer….as you might guess…is “IT DEPENDS!”
It’s hard to imagine interest rates falling too much farther. So the probability is higher rates in the future.
With that said, asking the the lender to fix your rate for 30 years puts all that risk on them…which you might like…but it’s insurance you’ll pay a premium for.
So the decision to go fixed or adjustable can be largely based on YOUR plans for the property. Do you plan to sell in 3-5 years? Do you plan to hold for 30 years?
Also, if you decide to exit the property in a few years…will you buyer be able to get affordable financing? You can’t always assume you can freely get out of the property…at least not at your price…because if rates are up…there will be less buyers and likely less appreciation.
We think it makes sense to look at the terms of your ARM…and if you can live with the WORST case scenario interest rates…and want to enjoy the low rates of adjustable in the meantime…and ARM could be a good choice.
On the other hand, if you’re squeezing into the property with thin cash flow based on a temporarily low interest rate…and you MUST get out in 3-5 years or you’ll go bust…an ARM can be a time bomb.
Just like picking your property carefully, it’s important to pick your financing carefully. And your mortgage advisors can be VERY helpful in making good decisions.
For now, listen to our two expert guests and consider how you can be a smarter borrower.
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