Get Your Mortgage Phil

If you think you can't get a commercial loan in today's market, think again! Today, we closed escrow on a self-storage facility in South San Francisco. I am going to describe the terms of this commercial loan for you so that you can get an idea of the appetite for these type of loans, and what was required by the lender to get it approved and funded.

This commercial loan was for $3,500,000. My client refinanced his building in order to consolidate the three outstanding loans on the property, and to get cash-out. He used the funds obtained to pay down outstanding consumer debt. In today's lending environment, obtaining cash-out with a commercial loan is not easy. 

Here are the terms of this commercial loan:

• 6.25% fixed for five years
• 25 year amortization
• 10 year term
• 1 point origination fee

The bank also wanted an environmental report. This report cost approximately $1800, which my client had to pay for upfront also.

Qualifying for a commercial loan is different than qualifying for a residential loan. The lender's main concerns are the type of property, and the cash-flow of the property. 

The type of property is important because certain types of commercial property are easier to sell, in case of default, than others. For example, an office building with many different businesses leasing space has more potential buyers than that of a single use facilty, such as a gas station.

The cash-flow of a property is important because a lender wants to be able to generate income from the property in case of default. My client has very good cash-flow because he has done a great job keeping a large percentage of the units in this South San Francisco self-storage facility rented. I am convinced this high-occupancy percentage and the amount of equity are the main reasons he had his commercial loan approved.

Helping building owners and buyers obtain a commercial loan is one of the services I provide. If you need this service, click here and describe your needs. I will do my best to find the best terms for you!

Do you feel like lenders are doing everything they can to not make loans instead of make loans? I do. Many of them tease you with a loan approval, but then, GOTCHA! They have a condition attached that makes it impossible to get the loan done.

This series will examine some of the conditions we mortgage originators see that sabotage otherwise strong loan files. I will try to point out the steps to take so that these gotchas don't happen to your clients. I encourage other mortgage originators to contribute to this series. We can either re-blog each other's articles and/or add each other as contributors to our ActiveRain outside blogs so that we can educate our real estate agents and have content to provide to our readers.

The first gotcha I would like to prevent is when the lender tells my client that their money is not their money. This can happen to self-employed clients. 

Many business owners have business bank accounts. When a client is a business owner, and wants to use funds from their business bank account, lenders usually have a condition that reads something like this:

"Applicant to provide letter from tax preparer stating that the applicant has 100% access to the funds from the business bank account, and that the withdrawal of these funds will not effect the functioning of the business"

Here's the problem: clients are having a very difficult time getting this letter from their tax preparer. Understandably so. Tax preparers do not want to be liable for making the statement required by the lender.

So, you ask, what is the solution? The solution is to prepare early. Lenders do not require this statement from a tax preparer if the funds are in a personal account of a self-employed applicant. If the applicant transfers the funds needed to a personal account, and keeps it in this account for two to three months (depending on the requirements of the lender) then these funds will be considered seasoned funds, and they can be used for the down payment, closing costs, and/or cash reserves.

It seems kind of silly, doesn't it, when a sole proprietor has to play this game. Suppose I had a bank account called "Phil's Mortgage Business". I am a sole proprietor, and the lender is telling me that this is not my money to use? Well, now that we know the rules of the game, let's play by the rules of the game.

My advice to real estate agents is to ask your self-employed clients at your first meeting if they are planning to use funds from their business account. If they say yes, e-mail them this blog post!

When someone buys a home before selling their current home, they may have a problem: if they have a mortgage on the old home, that debt is included in their debt-to-income ratio.

In the old days (pre-2008), home buyers who did not sell their home first had at least a couple of ways to offset their mortgage debt.

Some lenders would accept the income reported on a rent survey prepared by a licensed appraiser. Other lenders would accept a rental agreement.

The lender would subtract 25% of the income obtained by either of these methods off the top to account for expenses and vacancy. They would then subtract out the PITI (principal, interest, taxes, and insurance). If there was a positive balance left after this calculation, it was added to the homebuyer's income. If there was a negative balance, it was added to their debts.

Most lenders still use this method to calculate the positive income or negative debt. Now, however, there is a twist. You need to be concerned with the amount of equity in the old property. In addition, more documentation is required for rental income to be included. 

Fannie Mae now requires the following documentation to use rental income from a primary residence converted into a rental property:

• An executed lease agreement
• receipt from the tenant of a security deposit
• supporting documentation of deposit of the security deposit into the homebuyer's account

Here's something mortgage brokers and real estate agents should be aware of - it sure caught me by surprise! 

My client applied for a refinance of his first and second mortgage. We sent out two files.

We sent the file for the first mortgage to Provident Funding. We sent the file for the second mortgage to US Bank. He applied for an equity line to replace his current equity line (his current equity line lender will not subordinate).

Both loans were initially approved. Provident Funding asked for the loan approval of the equity line. 

We supplied the approval. Provident said they would not allow this equity line to go behind it because it has a pre-payment penalty!

The pre-payment is all of $350 if he closes the equity line in the first three years. I don't know of any equity line lender that does not have an early closure fee - do you?

Does anyone know if this is a Fannie/Freddie rule, or is this unique to Provident Funding?

Just another stupid reason to turn down a perfectly good loan, in my opinion.

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Contrary to popular belief, super jumbo loans are available in California. I want to let you know what I have found to be the maximum loan amounts from the lenders that my company is approved with. As you may have guessed, the requirements for super jumbo loans have gotten stricter.

In San Mateo County, where I live, the "agency (Freddie, Fannie)" jumbo limit is $729,750. The term "super jumbo loan" is relative - for the purpose of this article I will consider it to be any loan amount more than $1 million. The following guidelines are for the purchase of primary residences. 

On super jumbo loan amounts up to $2,000,000, the maximum loan-to-value (LTV) percentage is 80%. With loan amounts up to $1,100,000, secondary financing up to 90% of the purchase price is allowed (you're probably going to have to ask the seller to carry a second mortgage to get this outcome - I don't know of any banks lending to 90% in this price range).

A loan amount between $2,000,000 and $3,000,000 has a maximum LTV of 75%. If you or your client wants to put 20% down to obtain a super jumbo loan in this range, secondary financing is allowed up to 80% of the purchase price.

Super jumbo loans are available between $3,000,000 and $5,000,000 up to 70% of the property value. Secondary financing from the seller is OK up to 80% of the property value. 

If you need more than $5,000,000, you may need to consult with a private banker, or consider a private money loan. I have found that the highest LTV a private money lender will consider is 75% in California for a very strong borrower.

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My Jumbo Loan Blog

Here are ten reasons why you may need a private money loan in San Mateo County:

• Speed - private money lenders can move fast because they can give more attention to the files submitted. They are not processing hundreds or thousands of files per day, like banks do.

• stated income - private money lenders may not require income documentation as long as the file falls within regulation Z guidelines regarding stated income.
• low credit score - private money lenders are more willing to work with clients who have credit scores that fall below what the banks require. Their primary concern is equity in the property. Secondarily, they are concerned with the client's exit strategy, meaning the plan to get the private money loan paid off when it becomes due.
• High loan amount - many banks have reduced their maximum loan amount. Private money lenders can fill the void by funding large loan amounts.
• Unlimited Cash-out - The restrictions on cash-out have been tightened by institutional lenders. Private money lenders have the ability to fund loans that do not have restrictions on the amount of cash-out.
• Vesting - Many lenders do not allow title to be held by a corporation or LLC. Private money lenders are often able to fund loans with the property vested in a corporation or LLC.
• Bridge Loan - If you want to buy a home before you sell your current home, you may need a bridge loan. Private money lenders are often the source for this type of loan.

• Rental property cash-out - This type of transaction is another type that has had its guidelines tightened by most financial institutions. Although the rates are usually higher, private money lenders can fund this type of transaction.
• Incomplete construction - Construction projects sometimes stall because the financing source runs out of money. To complete construction, a private money lender can be a source of funds to fill the gap to finish construction.

• Pay off another private money loan - Private money loans are usually written for a short term (1 to 5 years). The private money borrower may not be able to qualify for an institutional loan when their current loan becomes due. Their only choice may be another private money loan.

If you are a borrower or a mortgage broker in San Mateo County, or anywhere in California, I can help you obtain private money financing.

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What Is A Private Money Loan?

Stated income loans are still available in Lake Tahoe. As of October 1, the rules have been changed regarding stated income loans. However, Lake Tahoe has many homes that are either second homes or rental properties. Second homes and rental properties are exempt from the new laws regarding stated income loans.

If you own or want to buy a second home or rental property in the Lake Tahoe area, there are stated income loans available for:

• up to $10 million
• unlimited cash-out
• flexible credit scores 
• up to 75 percent of the property value
• bridge financing

Fannie Mae has come out with new cash reserve requirements, and I see a conflict. On the one hand, you have the $8000 tax credit for first time home buyers. On the other hand, you have new guidelines released recently by Fannie Mae that is a credit tightening maneuver.

 On every transaction that is sold to Fannie Mae, there are a certain number of months of cash reserves required, made up of the sum of a homeowner's principal, interest, taxes, and insurance (PITI). The  cash reserve requirements are generally between two months and six months of PITI.

Fannie Mae has not  changed the number of months cash reserves required, but they have changed how cash reserves are calculated.

Cash in checking and savings accounts have had no change. Fannie Mae will count 100% of the verified funds in checking and savings accounts as cash reserves.

The value of stocks, bonds, and mutual funds used to be counted at 100% of the verified value. Here is the big change: only 70% of the value will be counted. 

The other change they have made is with the calculation of  cash reserves held in a retirement account. Fannie Mae used to count 70% of the value in a retirement account - the percentage now being employed is 60%.

Here are some consequences I see with these changes. First, if a homebuyer is short on cash reserves because of the new requirements, he may have to ask for a gift from a family member to close escrow to satisfy the reserve requirements.

Second, the buyer may have to liquidate their investment portfolio for the down payment instead of using savings in order to satisfy the cash reserves requirement. I am going to assume Fannie Mae will count 100% of an investment portfolio's value if it is used for the down payment - I could be wrong, it is too early to tell.

Finally, there is going to be some "messiness" in terms of the value of investments. Is it going to be the value at the time of loan origination, or the value at the time of underwriting? Either way, homeowners and home buyers are going to have to time their transaction with more care because of the stricter cash reserve requirements.

Those are the consequences I see. The other question I have is who is the government really trying to help? It seems to me that they are trying to strengthen credit quality, but if less people can qualify, what does that do to property values?  Aren't property values part of credit quality? There is no question that cash reserves are a strong factor in a borrower's ability to pay. However, if you tighten credit requirements, less people can buy, and demand weakens. Is this going to be an unintended consequence?

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Do you have transactions in California that make sense but are tough to place through institutional lenders, and deserve better than most hard money terms? Montecito Financial is a lender that you may want to consider contacting.

In addition to my business as a mortgage broker, I am representing this product on a wholesale basis through mortgage brokers who are licensed in California.

Here are some of the features of the product we are offering:

• Loan amounts to $8 million and more by exception
• unlimited cash-out
• 75% max loan to value
• primary residence, vacation homes, investment property, and commercial property
• full documentation or stated income
• rate reductions for <45% LTV, full documentation, and 720+ scores 

I read a blog post today on Cyberhomes blog (an excellent website and blog, by the way). It's latest post is titled "Searching For Good Mortgage Brokers" .

In the post, the author writes, "For people who worry about finding a reputable broker (e.g., one who won't steer you into a loan with hidden exorbitant fees so he can collect higher compensation), there's a website you can try." The website is called upfrontmortgagebrokers.com.

This is the website for the Upfront Mortgage Brokers Association (UMBA). The home page of the website states that it was "founded for consumer advocacy" a noble goal. It also states on the home page "Most professional associations are formed to further the interests of the individuals forming the organization. Members of UMBA are mortgage brokers whose interests are fully aligned with those of the consumer.

Association members believe that, in serving the public interest, they will be working toward a better profession, which, ultimately, will further their professional/personal goals."

I am not a member of this association. This is not an attack on the association or its members. My question is whether this association is relevant any more.

Here is why I ask this question: On the home page of their website there is a link for consumers to click on that says "Why Choose An Upfront Mortgage Broker". On this PDF, it states "the key element of the UMB commitment is the requirement that the fee for the UMB's services be negotiated and established at the start of the mortgage process."

The reason I ask if UMB's are relevant is because of the amount of disclosure that we have to do as mortgage brokers in terms of our compensation.

First, we have to send out a Good Faith Estimate with our fees disclosed. We also have to have separate forms signed that disclose our fees again before we can submit our files to our lending partners. I think by the time we have submitted the file, our clients are very clear in terms or our compensation.

Maybe I am missing something. Again, this is not an attack on upfront mortgage brokers. But it seems to me that the government and our lenders have taken care of consumers in terms of mortgage broker fee disclosures.

Here's a question for you for you mortgage bankers - how come there is no upfront mortgage banker association? Mortgage bankers don't have to disclose how much they are compensated.

I typed in "upfrontmortgagebankers.com" into my browser. It said "sorry page not found".

As a service to my mortgage banking buddies, I went on register.com to see if upfrontmortgagebankers.com is available. It is! Here's your chance to bring full disclosure to consumers!

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Burlingame Mortgage