Evolving into a nationwide phenomenon with meaningful benefits for both investors and the communities they serve, the real estate investment landscape experienced steady growth between 2013 and 2023, primarily due to local mom-and-pop investors. Growth in real estate investment also creates opportunity for mortgage originators. These deals can be funded with residential transition and debt-service-coverage ratio (DSCR) loans.

“Despite the near-term headwinds in the market, the future is bright for real estate investors.”

 Knowledge of this market is a useful tool if you currently offer these products or are considering them for your arsenal. Real estate investing has a deep history, presents unique loan scenarios and promises a bright future.

Market history

Fix-and-flip home renovations might be a ubiquitous concept today, thanks to HGTV. But the phenomenon of acquiring properties to update and resell them really took off in the 1980s, when economic downturns and dwindling stock market returns led to a surge in home foreclosures.

Rather than let these properties go to waste, investors took notice of the profitable opportunity. They began purchasing foreclosed homes with the intention of renovating and reselling them for a profit once the housing market showed signs of recovery.

Throughout the 1980s and ‘90s, this trend was propelled by private financing that fueled a growing interest in renovation of older properties. Inspired by TV shows like “This Old House” and encouraged by emerging retail giants like Home Depot and Lowe’s, many new homeowners began to undertake DIY renovation projects that paved the way for the YouTube channels and TikTok videos of the modern era that are focused on house flipping.

Today, flipping is seen as a viable profession as investors have gotten the cycle of purchasing, renovating and reselling properties down to a science. The financial crisis of the late 2000s triggered a surge in private debt as the primary financing source for individual real estate investors, especially in the fix-and-flip sector. Private lenders began offering short-term bridge loans that became a hit for borrowers, due to the quick approvals and more lenient credit criteria when compared with traditional financing methods.

Trends over time

According to real estate analytics company Attom, the percentage of homes purchased for flipping purposes rose from 5.8% in 2020 to 8.4% in 2022. These investments yield varying returns but generally prove profitable, with year-end 2022 Attom data showing an average gross profit of $67,900.

Where these investments are happening has changed a lot in the past decade. The most popular residential markets of 2013 — including Houston, San Francisco, and Bethesda, Maryland — have now been superseded by markets like Atlanta, Raleigh and Dallas-Fort Worth, which topped the National Association of Realtors’ 2023 list of the hottest markets. Fix-and-flip transactions have increased from 4.6% of all U.S. single-family home sales in 2013 to 7.2% of all sales in third-quarter 2023. The current wave of fix-and-flip activity is being driven by several trends.

First, an increasing number of households are seeking move-in ready homes, driving the demand for renovated single-family properties. Existing home inventory has decreased steadily over the past decade. Although supply entered an upswing from the ultra-low inventory early in the COVID-19 pandemic, the 3.6 months of supply at the current sales rate in October 2023 was down from five months a decade earlier. Low supply has created opportunity for real estate investors to provide housing solutions.

Second, 60% of real estate investors are small-scale, mom-and-pop investors and business owners who prioritize investments in their local communities, according to Kiavi data. They play a pivotal role in revitalizing neighborhoods through renovation and repurposing of under-improved homes, bringing a community-based mindset to their projects.

Third, sustained demand for rental housing has created a steady stream of cash flow for real estate investors. The number of single-family renter households has increased from 40.2 million (or 30%) of all U.S. households in 2013 to 45.2 million (or 35%) in 2022, per census data. This provides investors with a consistent source of income.

Lastly, the aging U.S. housing stock presents an opportunity for real estate investors to renovate older homes and meet the growing demand for turnkey properties. This helps create more affordable housing options and future opportunities for homeownership.

Short-term forecast

Technology and data are the future of real estate investing. Data-driven technologies, including advanced artificial intelligence (AI) and machine learning models, are set to empower investors by dismantling traditional borrowing hurdles, automating time-intensive processes, and delivering swift and more tailored financing.

Today’s borrowers want access to personalized, transparent pricing and on-demand capital. Advanced technologies synthesize extensive data sources to reveal insights that enable investors to make faster, more informed decisions. Precise assessments of factors such as after-repair value ultimately increases the likelihood of success for each project. This efficient use of data clarifies potential risks and rewards, providing a structured pathway for investors to have lucrative and successful projects.

AI and machine learning models are becoming more sophisticated, providing clarity to lenders about primary risk factors tied to the investor, property and local market conditions. These models create better overall outcomes from an underwriting perspective and empower investors to successfully exit projects.

Although interest rates won’t be returning to historic lows anytime soon, there remain plenty of opportunities for investors looking to grow their business. Given the low inventory of homes for sale and the number of buyers looking for move-in ready homes, fix-and-flippers did well in 2023. And we can expect to see this trend continue in the coming years.

Despite the near-term headwinds in the market, the future is bright for real estate investors. From fix-and-flip projects to long-term rentals and new construction, each real estate investment helps to revitalize neighborhoods and provide much-needed turnkey housing, all while enabling investors to achieve their wealth-creation goals. ●

The post A Decade of Transformation and Growth appeared first on Scotsman Guide.

A nonwarrantable condo is part of a development that falls short of meeting eligibility standards set by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, as well as government-backed programs from the Federal Housing Administration and U.S. Department of Veterans Affairs. These standards exist to minimize risk for lenders and ensure that loans supported by these entities remain secure investments.

“Nonwarrantable condos introduce distinct living advantages for homebuyers, but they also come with financing intricacies.”

Understanding whether a condo is warrantable or nonwarrantable holds immense importance as it directly impacts the borrower’s ability to secure financing. Mortgage originators who know the differences between warrantable and nonwarrantable condos can gain a competitive edge in their markets, especially if they work with lenders that are willing to finance nonwarrantable units.

Undesirable designation

Typically, nonwarrantable condos falter in meeting one or more criteria set by the GSEs or government agencies. For instance, at least 50% of the units in a condo community must be owner-occupied. A failure to meet this threshold means that the community will be labeled as nonwarrantable.

If a substantial portion of the condo complex is designated for commercial use, it might lose its warrantable status. If a project includes hotel, motel or resort elements like a booking desk, the GSEs might not endorse it.

If at least 25% of the condo owners aren’t up to date on their homeowners association (HOA) dues, the complex may become nonwarrantable. When HOAs fail to allocate 10% of their revenues toward reserve funds, the GSEs may remove their warrantable designation.

Condo complexes embroiled in unresolved legal disputes might be deemed nonwarrantable. When a condo complex lacks sufficient insurance coverage or faces an open insurance claim, these can prove to be roadblocks to the warrantable tag.

Potential advantages

Many mortgage lenders hesitate to lend on nonwarrantable condo purchases because Fannie Mae and Freddie Mac won’t underwrite these loans. But other lenders, armed with portfolio loan products for a nonwarrantable condo, may step in to provide financing.

This can be advantageous to a borrower. A nonwarrantable condo may sell for less than market value, depending on the issues that are causing it to be considered nonwarrantable. Therefore, if the issues are resolved and the property may be treated as warrantable in the future, the value and future resale appeal could increase significantly. Nonwarrantable condos also may provide the unit owner with access to better amenities and increased security, especially if it’s part of a resort or hotel.

Still, nonwarrantable condos tend to be riskier for lenders due to their noncompliance with GSE guidelines. Consequently, obtaining a mortgage for a nonwarrantable condo can be more challenging and often comes with additional financing costs.

Lenders may impose higher interest rates to counter the heightened risk associated with a nonwarrantable condo. They also might require borrowers to make a more substantial downpayment, often surpassing the standard 20% for a conventional loan. Nonwarrantable condos may restrict the borrower’s selection of lenders, as not all financial institutions are willing to underwrite loans for such properties.

Well-versed professionals

A borrower contemplating the purchase of a nonwarrantable condo must be well prepared. They will need the advice of an experienced originator and, preferably, a real estate agent who are well versed in nonwarrantable transactions.

Originators should work with lenders that have expertise in financing nonwarrantable condos. Savvy originators can guide clients through the lending process and secure favorable terms. They should thoroughly scrutinize the HOA documents to identify potential concerns like pending litigation or delinquent dues. Originators can also investigate alternative financing avenues such as portfolio lenders or private lenders, which may be more open to funding a nonwarrantable unit.

Selling a nonwarrantable condo also requires a nuanced approach. Given the potential financing hurdles for buyers, it’s essential for an owner to understand that interest in their property may be limited. Experienced real estate agents and originators can be a valuable resource, connecting these sellers with lenders that cater to nonwarrantable condos.

Lawmakers, both locally and nationally, have been working to protect condo buyers. The city of Chicago, for instance, has revised its municipal codes to bolster consumer protections. Key changes include enhanced rights for prospective buyers, who now receive a straightforward, standardized disclosure document that contains critical information about the condo.

Developers are legally obligated to furnish this document when offering condos for sale, whether during open houses or other presentations. Tenants who reside in buildings undergoing conversions into condos also enjoy expanded rights under this rule. Chicago’s ordinance stipulates that a developer overseeing a conversion must formally notify existing tenants through both mailed correspondence and prominently displayed postings.

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Nonwarrantable condos introduce distinct living advantages for homebuyers, but they also come with financing intricacies. If you’re working with a client who is contemplating such a purchase, diligently prepare them and be ready to address potential challenges on their path to homeownership. With your guidance, they can confidently navigate the realm of nonwarrantable condos and make informed decisions. ●

The post Condominium Expertise Can Pay Dividends appeared first on Scotsman Guide.

The average U.S. homeowner possessed an impressive $288,000 in equity at the midpoint of 2023, according to CoreLogic. This was a substantial increase from the $182,000 recorded prior to the COVID-19 pandemic. One popular way to access home equity is with a second mortgage.

“Non-QM second-lien mortgages also offer greater creativity in underwriting, making it possible for borrowers with less-than-perfect credit histories or irregular income streams to access equity.”

A second mortgage provides homeowners with a convenient and flexible source of funds. Whether the funds are used to finance home improvements, consolidate debt, subsidize education or secure additional investments, second mortgages are an effective means to achieve personal financial goals.

In 2022, this market expanded with the introduction of a nonqualified mortgage (non-QM) version of a second lien. Non-QM loans are those that cannot be purchased by the federal government or the government- sponsored enterprises, Fannie Mae and Freddie Mac. Conventional and non-QM second mortgages are tools for mortgage originators to help clients meet their financing needs.

Second lien

A second mortgage is a type of loan that is taken out on a property that already has a primary mortgage in place. It is also commonly referred to as a second lien because it is subordinate to the first mortgage. In case of default, the first mortgage lender has priority in recouping their money from the sale of the property.

Because of the existing first mortgage on a property, a second mortgage is taken out against the portion of the home that has already been paid off. A lender will determine how much equity is in the home and will then structure a loan against a portion of it, leaving the first mortgage fully intact.

Second mortgages are popular with borrowers for many reasons. First, unlike other types of loans, the money from a second mortgage can be used for almost any purpose. Second, interest rates on second mortgages are substantially lower than other kinds of consumer debt products. This is why it’s especially appealing to use funds from a second mortgage to pay off high-interest credit cards.

Finally, when a borrower takes out a second mortgage on their home, they can receive the entire amount of the loan in a lump sum at closing. Depending on their circumstances and how they intend to use the funds, this can be particularly advantageous to the borrower.

Informed decisions

Understanding the intricacies of second mortgages is crucial, as it can empower homeowners to make informed decisions and maximize their equity without compromising their long-term financial security. Like any major financial decision, there are pros and cons to consider when borrowing funds in this fashion.

Second mortgages often come with lower interest rates compared to credit cards or personal loans because they are secured by a home’s equity. If the second mortgage funds are used to erase high- interest debt, this can result in significant savings to the borrower.

The interest paid on a second mortgage is deductible, albeit only under certain terms. The type of loan and the amount of debt, as well as the loan origination date, are factors that can determine whether a second mortgage qualifies for a tax deduction. Investing the funds from a second mortgage into home improvements can increase the value of a property, potentially providing a return on investment when the house is sold.

But there are drawbacks. Since a second mortgage is secured by a borrower’s home, failure to make payments could lead to foreclosure. Acquiring a second mortgage means the assumption of more debt. It is crucial for borrowers to ensure they can afford the additional payment without straining their budget.

Obtaining a second mortgage may involve the payment of various expenses, including application fees, appraisal costs and closing costs. These additional fees can increase the overall cost of the loan. A second mortgage also reduces the equity in a home. Economic changes or a decline in the housing market can affect the value of a home, potentially leaving a borrower with less equity than they might have expected.

Another option

For some borrowers who wish to access the equity in their homes, a home equity line of credit (HELOC) might be a more suitable option than a second mortgage. Both types of loans allow homeowners to access money from accrued equity.

A HELOC, however, is substantially different in terms of how funds are accessed, the repayment obligations and other key aspects. A borrower’s home serves as collateral for the loan.

The lender will typically determine the maximum amount that can be borrowed based on a percentage of the home’s appraised value and the remaining first mortgage balance.

The lender will establish a set credit limit, and the borrower can access and repay money as needed within that limit. HELOCs usually have a draw period of five to 10 years. During this time, the borrower is only required to make interest payments on the amount that has been withdrawn.

After the draw period ends, the borrower enters the repayment period. During this phase, no more money can be taken out, and the borrower begins to repay the loan principal and interest. Repayment periods typically last 10 to 20 years. HELOCs are generally offered with variable interest rates, which means that the rate can change over time based on fluctuations in a specified benchmark, such as the prime rate.

Individual situations

Whether a second mortgage or a HELOC is a better option for a homeowner depends on individual financial situations, goals and preferences. There’s no one-size-fits-all answer, as both options have their own advantages and disadvantages.

Second mortgages often come with fixed interest rates, which means that the borrower’s monthly payments remain consistent over time. This can provide more stability and predictability compared to HELOCs, which usually have variable rates.

If your client needs a significant amount of money upfront for a specific purpose, a second mortgage might be more suitable as it typically provides a lump sum. Since second mortgages come with a fixed repayment schedule, it can be easier to budget for these regular payments over the life of the loan. This can be especially beneficial for homeowners who prefer the discipline of consistent payments.

If current interest rates are favorable, a second mortgage with a fixed interest rate can help you lock in the same rate for the entire loan term, protecting the borrower from any future rate hikes. Second mortgages often have longer repayment terms compared to HELOCs. This can result in lower monthly payments, which might be advantageous for homeowners with tighter budgets.

When a borrower takes out a second mortgage, they make a one-time decision regarding the loan amount and terms. This can be appealing if they prefer to secure a specific amount of money without ongoing access to credit like a HELOC.

Greater flexibilty

The introduction of non-QM second mortgages are blazing a new trail for even greater flexibility to tap into home equity. Non-QM second-lien mortgages stand out in the world of lending due to their unique characteristics and flexibility.

Unlike traditional mortgages, these loans do not conform to the stringent guidelines set by Fannie Mae and Freddie Mac. This nonconformity allows lenders to tailor loan terms to individual borrowers, making them an attractive option for those with unique financial situations or nontraditional income sources.

Non-QM second-lien mortgages also offer greater creativity in underwriting, making it possible for borrowers with less-than-perfect credit histories or irregular income streams to access equity. While they may come with slightly higher interest rates to mitigate risk, these loans provide an invaluable alternative for those who wouldn’t otherwise qualify for traditional financing, highlighting their distinctive place within the mortgage market.

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Whether it’s a second mortgage or a home equity line of credit, these loans provide homeowners with access to additional funds, allowing them to finance major expenses or pursue financial goals. Before they choose to go this route, it’s essential to carefully assess your client’s financial situation, compare interest rates and terms from different lenders, and consider the potential risks and benefits. ●

The post Open the Vault appeared first on Scotsman Guide.

“The beauty of non-QM is that whatever tricky situation a borrower might have, there is a likely solution.”

Because of these prevailing trends, mortgage brokers must explore strategies to diversify their loan products. One area to explore is the arena of nonqualified mortgages (non-QM). These are often quality loans that do not meet the strict guidelines to be purchased by the government-sponsored enterprises or the federal government.

Tightened credit

This year has been marked by a significant amount of volatility in the U.S. banking sector. The failures of Silicon Valley Bank, Signature Bank and First Republic Bank created ripples throughout the financial landscape.

In the wake of the upheaval came proposed changes to Basel III capital requirements for major banks, with regulators aiming to finalize the rules by 2025 and fully phase them in by 2028. (Basel III is an internationally recognized set of regulations developed by the Basel Committee on Banking Supervision in response to the financial crisis of the late 2000s.)

“Industry experts, banking trade groups and regulators concur that the proposed rules are poised to impede bank lending capabilities, propelling consumers toward nonbank alternatives.”

Industry experts, banking trade groups and regulators concur that the proposed rules are poised to impede bank lending capabilities, propelling consumers toward nonbank alternatives. Despite the extended timeline for compliance, banks are already experiencing a sense of urgency to align with the new rules ahead of the deadlines. This stance has led to a tightening of credit boxes, with anticipations of further constrictions in lending standards.

For example, banks reported having tightened lending standards for all categories of residential mortgages during second-quarter 2023, according to a Federal Reserve survey of senior loan officers. This scenario represents a strategic opportunity for mortgage brokers to capture the market share of borrowers turned down by banks and redirect that business toward nonbank lenders.

Lucrative opportunity

In the face of the banking crisis, mortgage brokers can offer non-QM loans to fill the void created by recent restrictions. According to the Fed survey, a significant portion of banks reported having tightened standards on non-QM jumbo loans and, to a lesser extent, non-QM loans that meet conforming loan limits.

For originators grappling with reduced loan volumes, non-QM products emerge as a lucrative revenue channel and offer a plethora of options that cater to diverse borrower needs. Three non-QM products, in particular, are witnessing a surge in demand.

The first is the debt-service-coverage ratio (DSCR) loan for investors. More than 70% of small rental properties (one to four units) are owned by individuals, and nearly all of them are managed by the same people, who are defined as mom-and-pop landlords, according to the U.S. Census Bureau. Mortgage brokers can fill the needs of this target market by offering DSCR loans, which focus on the property’s cash flow rather than the borrower’s income.

Self-employed individuals have a persistent need for creative loan solutions, and there are now about 16.5 million self-employed people in the U.S. Instead of tax returns, non-QM loans offer these borrowers alternative ways to show income, such as bank statements or profit-and-loss statements.

Non-QM lending adeptly caters to foreign nationals who inspire to invest in U.S. rental properties or vacation homes. By contrast, many banks (even before the recent banking crisis) have traditionally shied away from mortgages to international investors. There is plenty of opportunity here for mortgage brokers, with the dollar volume of U.S. residential real estate purchases by foreign buyers topping $53 billion in the year ending this past March, according to the National Association of Realtors.

Powerful solutions

The beauty of non-QM is that whatever tricky situation a borrower might have, there is a likely solution. These specialty lenders are typically known for allowing higher debt-to-income ratios (50% to 55%) and lower credit scores (low 600s or high 500s). There are powerful options afforded by non-QM for all sorts of scenarios.

For instance, loan approval for a condominium is more difficult than it is for a single-family home, especially if the condo is nonwarrantable (does not satisfy the lending criteria of Fannie Mae and Freddie Mac). Non-QM lenders specialize in lending on nonwarrantable units, whether the issue concerns construction defect litigation or lack of adequate budget reserves by the condo association.

A narrow subset of DSCR lending caters specifically to short-term rental investments such as Airbnb and condotel properties. The non-QM lenders that offer these loans have flexible guidelines geared toward the calculation of short-term rental income.

As the recent Fed survey indicated, one area that banks cut back on the most this year is non-QM jumbo loans (those sized above $726,200 for a single-family residence in most areas of the country). With banks turning away applications for large loan amounts, mortgage brokers can step in to save the day. For example, there are non-QM lenders that offer “super jumbo” loans from $3 million to $30 million.

While the demand for rate-and-term refinances has taken a nosedive, opportunity remains for brokers to originate cash-out loans, especially since non-QM lenders allow generous amounts of cash back at the closing table. There are even non-QM, no-ratio loans for owner-occupied properties. This super niche product does not verify income or employment, as long as the borrower has a strong credit score and isn’t seeking a particularly high loan-to-value ratio.

By seizing the opportunities presented by the banking crisis and the tightening of lending standards, brokers can use non-QM products to continue providing value, flexibility and diversity in their mortgage offerings. This can allow brokers to serve a broader spectrum of clients.

Effective strategies

As mortgage brokers venture into the diverse landscape of non-QM lending, it’s imperative to do so wisely. First, partner with reputable non-QM lenders. Meticulously research these potential partners before signing up with them.

The market turbulence of 2022 resulted in several non-QM lenders scaling back or ceasing their operations. More recently, some non-QM lenders have stopped offering certain niche products like the owner-occupied no-ratio loan, since it requires the lender to hold a special certification from the Community Development Financial Institutions Fund. These trends emphasize the importance of aligning with solid and reputable non-QM lenders.

Cultivate relationships with bankers, Realtors, accountants, attorneys and financial planners. Now more than ever, bankers are turning down their client’s mortgage requests. These clients would appreciate a referral to a quality mortgage broker. Engage in lunch-and-learns, particularly with Realtors. You’ll not only garner referrals to their clients but also cater to the agent’s investment property and self-employed lending needs.

Lastly, invest time to attend training workshops and acquire in-depth knowledge of each non-QM product. Establish a rapport with a proficient account executive and become well versed in the nuances of each product. This will allow a broker to pivot from selling rates (which are currently unappealing) to selling solutions.

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Mortgage brokers are strategically positioned to leverage the opportunities arising from an evolving financial ecosystem. By embracing nonbank lenders and diversifying their portfolios with non-QM lending options, brokers can address the diverse needs of borrowers and establish a book of business that’s resilient to any economic or banking uncertainties. ●

The post Banking Upheaval Creates New Opportunities appeared first on Scotsman Guide.

In Episode 020 of the Scotsman Guide Author Showcase, Carl White interviews Tom Davis of Deephaven Mortgage about his article, “Invest in Your Future” in the October 2023 issue of Scotsman Guide Residential Edition.

Tom Davis is chief sales officer of non-QM lender Deephaven Mortgage. He joined Deephaven in 2022 and has more than 20 years of experience helping lending partners with their non-QM and agency needs. He holds a bachelor’s degree from Florida Atlantic University, where he double majored in finance and management. Deephaven was founded in 2012 and led the formation and development of the non-QM market. 

The post Author Showcase: Tom Davis, Deephaven Mortgage appeared first on Scotsman Guide.

Nonqualified mortgage (non-QM) programs have gained popularity as a feasible choice for borrowers with distinct financial circumstances. Non-QM loans are quality loans that cannot be purchased by the government-sponsored enterprises or the federal government. There’s a surprising number of non-QM loan types available that can help potential borrowers who are in good financial situations but may not have a W-2 income.

These mortgages can unlock opportunities for clients to purchase a home and they offer adaptability in an ever-changing lending environment. Mortgage originators can build their business and meet their clients’ needs if they’re familiar with these products.

Decisive advantages

One of the key advantages of non-QM loans is the flexibility they offer in underwriting guidelines. Unlike traditional loans, non-QM programs take a more holistic approach to evaluating a borrower’s creditworthiness. These loans consider various factors beyond conventional metrics. This flexibility allows borrowers with nontraditional income sources or irregular employment histories to secure financing.

Non-QM lenders understand that financial profiles can be complex, so they cater to borrowers who don’t fit the rigid requirements of conventional loans. Self-employed individuals, freelancers and those with income streams that aren’t documented on a W-2 form can benefit from this flexibility. Non-QM loans consider bank statements, tax returns and other documentation that provide a more accurate representation of a borrower’s ability to repay a mortgage.

Non-QM loan programs revolutionize the lending landscape by offering expanded options that cater to a borrower’s diverse needs. These programs provide a broader range of products specifically tailored to meet the requirements of individuals who may not qualify for a traditional loan. The inherent flexibility of non-QM loans allows borrowers to explore alternative financing solutions that align with their unique circumstances.

Additionally, non-QM loans often have less stringent documentation requirements. While still adhering to responsible lending practices, these programs may accept alternative forms of income verification, making it easier for self-employed individuals or those with irregular income streams to access homeownership.

Compared to conventional mortgages, non-QM loan programs often feature a faster approval process. Non-QM lenders focus more on the borrower’s ability to repay and the collateral value rather than conforming to rigid guidelines. With less emphasis on extensive documentation and a more streamlined evaluation process, non-QM loans can be approved more quickly, enabling borrowers to secure financing promptly.

This accelerated approval timeline is especially beneficial in competitive real estate markets or when time is of the essence. Borrowers who may have missed out on a property due to a lengthy approval process with a traditional lender can turn to a non-QM loan for a quicker resolution.

Versatile options

One of the strengths of these loan programs is the versatility to offer a number of options for varying situations. A bank-statement loan, for instance, can be offered to a client who can show a set amount of income over 12 to 24 months, giving them the ability to purchase a home without having a traditional W-2 income.

Let’s say a self-employed applicant wants to purchase a home. The person owns multiple commercial properties with negative business-tax-return income and cash flow due to deferred maintenance on the properties and a lack of rental income tied to COVID-19 restrictions. But the brick-and-mortar business itself has more than sufficient revenue now to pay for the mortgage. A lender could approve a loan for this business owner by averaging their monthly deposits and factoring in a 50% expense ratio, thereby completing the financing for the purchase of a primary residence without the need for personal or business tax returns.

Another non-QM program is the asset depletion loan. If a borrower faces difficulty in qualifying for a traditional mortgage due to limited income, he or she could qualify if they have substantial assets — such as investments, savings or retirement funds. In these situations, an asset depletion mortgage program could come to their rescue. Instead of solely relying on income, the lender factors in the value of assets and their potential to generate income over time.

By incorporating both profit-and-loss statements and 1099 miscellaneous income forms, self-employed individuals or independent contractors can address the obstacle of lacking a steady monthly salary. These individuals can leverage their profit-and-loss statements to prove their financial stability and become eligible for a loan. Instead of relying solely on monthly income, the lender can consider the average annual reported income over 12 or 24 months to assess their repayment capability. This approach provides a more accurate picture of the client’s financial standing and helps them qualify for the mortgage they need.

Non-QM lenders offer a second chance for borrowers with past credit issues. While conventional loans may be out of reach for those with previous bankruptcies, foreclosures or recent credit events, non-QM lenders evaluate credit history within a broader context. They account for extenuating circumstances and the borrower’s ability to manage their finances since the negative event occurred.

This aspect of non-QM lending provides an opportunity for responsible borrowers who have rebounded from financial setbacks to obtain financing. It acknowledges the potential for financial recovery and offers a path to homeownership that would otherwise be inaccessible.

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Non-QM loan programs offer a host of advantages that empower borrowers who face unique financial situations. The flexibility in underwriting guidelines, expanded loan options, faster approval processes and second-chance opportunities often make non-QM loans valuable tools for those who don’t fit the traditional lending mold. ●

The post These Loans Should Take Center Stage appeared first on Scotsman Guide.

In Episode 018 of the Scotsman Guide Author Showcase, Carl White interviews Joseph Lydon of LendSure Mortgage Corp. about his article, “Capture Attention by Doing What Others Can’t,” in the October 2023 issue of Scotsman Guide Residential Edition.

Joseph Lydon is co-founder and managing director at LendSure Mortgage Corp. He has spent more than three decades in the mortgage industry, including serving as president and chief operating officer at Accredited Home Lenders from 1997 to 2008. He also has worked at Ford Consumer Finance and Security Pacific Financial Services. Lydon earned a bachelor’s degree in management from Pepperdine University and a master’s degree from the University of San Diego.

The post Author Showcase: Joseph Lydon, LendSure Mortgage Corp. appeared first on Scotsman Guide.

While Fannie Mae and Freddie Mac update the conforming loan limits each year, many homes in pricier markets still don’t qualify for mortgages backed by the government-sponsored enterprises. That’s where jumbo originators come in, armed with the products and knowledge to make $1 million-plus loans possible for high-end clients.

Jumbo loans have seen a significant increase in popularity of late. In 2020, they represented only 19% of the market, according to CoreLogic data. But in 2022, the jumbo share of the market was 32%, the highest level seen since 2005.

Welcome to Scotsman Guide’s first-ever Top Jumbo Originators ranking. This list focuses on originators who regularly produce these large, nonconforming loans. To create this list, the publication calculated and ranked the average loan size for everyone who qualified for its 2023 Top Originators rankings (based on full-year 2022 origination volume). On the next two pages, you’ll find 100 originators who specialize in serving elite clientele, each with an average loan size of more than $1 million.

These originators appear to value quality over quantity. While the number of loans closed by the Top Jumbo Originators ranges widely, from 25 to 552, the median number of closed loans is 58. The median dollar volume is $77.5 million, good for a median loan size of $1.3 million.

The geographic breakdown of these originators is not unexpected: California dominated the rankings, with 58 of 100 originators based in the Golden State. New York was a distant second with 19 originators on the list, while Texas, Connecticut and Maryland each have three originators.

Many of these originators work for private banking arms — or well-placed branches — of large institutions like Citibank and U.S. Bank, each of which have more than 20 originators in this ranking. But independent brokers are represented too. Notably, Beverly Hills-based boutique brokerage Insignia Mortgage Inc. has four originators in the top 11.

In fact, Insignia broker Romy Nourafchan took the No. 1 spot, with an average loan volume last year of more than $3.27 million. Nourafchan has been building his jumbo business since the 1990s and has a wide base of clients, with loans ranging from $1 million to $50 million and beyond. To learn more about Nourafchan and his business, read his Featured Top Originator profile on Page 18.

Second place went to Ghazal Doustar of U.S. Bank, with an average loan size of $3.16 million. Rounding out the top five are Anish Singla of U.S. Bank ($2.84 million), Damon Germanides of Insignia Mortgage ($2.75 million) and Kevin Cassell of City National Bank of Florida ($2.35 million).

We hope you enjoy this new ranking and find it informative. Feel free to reach out with any questions, comments or concerns. Warm wishes for a wonderful autumn, and as always, thank you for reading.

Midwest cities offer advantages for first-time homeowners

The cost of the first year of homeownership — including downpayment and fees, mortgage payments, homeowners insurance and property taxes — varies widely across the country. Point2, a division of Yardi Systems, recently analyzed the 100 largest U.S. markets to pinpoint the most and least affordable cities for first-year homeownership.

Sixteen cities had first-year costs of less than $80,000, with most of these in the Midwest. Detroit was the least expensive city, with total costs of about $25,000 for the first year, followed by the Ohio cities of Toledo and Cleveland, each under $40,000. Fort Wayne, Indiana, and St. Louis rounded out the top-five least-expensive cities with costs in the $60,000 range.

Conversely, the 15 most-expensive cities had costs that exceed $200,000. California accounted for each of the top-eight priciest cities. Unsurprisingly, San Francisco topped the list with total first-year costs of $390,000. A smaller Bay Area neighbor, Fremont, was not far behind, followed by San Jose, Irvine, Los Angeles, San Diego, Oakland and Anaheim.

Point2 also found that median-income renter households that save 20% of their annual income can take anywhere from four to 24 years to save up enough to cover these first-year costs. Los Angeles had the longest timeline among the cities analyzed, while Detroit had the shortest.

Coastal urban counties have lowest homeownership rates

The national homeownership rate has increased slightly in the past few years, but many counties — especially those in coastal urban areas — continue to lag. A recent analysis from the National Association of Homebuilders found that 2021 homeownership rates ranged from less than 25% in urban counties of New York to more than 90% in suburban and rural counties of Colorado and the South.

Population density has a lot to do with the lower rates in urban counties, the analysis noted. Four counties in the New York City metro area were among the 10 lowest rates in the nation. Bronx County registered a 19.8% homeownership rate. New York County (Manhattan), Kings County (Brooklyn) and Hudson County, New York, each had rates below 33%.

Similar trends can be found on the West Coast. San Francisco and Los Angeles counties have respective homeownership rates of 38.2% and 46.2%. Meanwhile, California counties with less density (including Alpine, Amador, Calaveras, El Dorado and Sierra) hover around 80%.

The 10 counties with the highest homeownership rates in the nation each exceeded a 90% rate. Four of these counties were in the census bureau’s Mountain Division: Colorado’s Elbert and Park counties (92.6% and 91.1%, respectively), along with Storey County, Nevada (96.5%), and Meagher County, Montana (92.1%). Five others were in the states of Texas, Louisiana, Virginia, Alabama and West Virginia.

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“A perfect storm of economic and housing factors conducive to a strong rental market is driving the sustained spike in DSCR loan demand.”

DSCR loans are also specifically geared to meet the needs of investors who are purchasing various types of real estate. These include single- family rentals, townhomes, two- to four-unit properties, warrantable or nonwarrantable condominiums, and planned unit developments.

Supply growth

A perfect storm of economic and housing factors conducive to a strong rental market is driving the sustained spike in DSCR loan demand. Millennials — today’s largest housing cohort — have new and growing families that require more space. Many are renting single-family residences in built-to-rent communities until they can find and afford a home of their own.

From September 2021 to September 2022, the number of built-to-rent homes delivered across the U.S. increased by 42%, according to the National Association of Home Builders. The conversion of commercial buildings into multifamily housing is also a growing trend in multiple markets, according to the Urban Land Institute and the National Multifamily Housing Council Research Foundation. Here are some other pertinent statistics:

According to a Roofstock study, approximately 10.6 million Americans derive income from a total of more than 17 million rental properties.

CoreLogic notes that real estate investors were responsible for 27% of single-family home purchases in first-quarter 2023, with transactions from small- and medium-sized investors representing the bulk of this activity.

The U.S. Census Bureau estimates that 81,000 single-family rentals were started last year, a record-high number that accounted for at least 8% of all new construction.

Meanwhile, the movement toward apartment living remains robust, especially in urban core neighborhoods. When looking exclusively at apartment construction in downtown areas, Atlanta led the nation by adding more than 21,000 units from 2013 to 2022, according to StorageCafe. Other cities that followed close behind include Los Angeles, Houston, Charlotte and Miami.

Solving challenges

Investors value the speed and relative ease of procuring DSCR loans, especially in hot markets where there is heavy competition for properties. Equally valuable to these investors are knowledgeable mortgage brokers, who know how these loans can overcome common financing challenges.

For example, new Fannie Mae and Freddie Mac guidelines recently imposed on condominiums have narrowed the definition of a warrantable condo. Investors looking to add rental condos to their portfolios often must turn to DSCR loans to purchase nonwarrantable units. Additionally, Fannie and Freddie will not back loans to investors who already own 10 financed properties. But DSCR loans do not have this limitation.

Beyond solving these common challenges, there are other reasons why experienced investors find DSCR loans to be particularly advantageous. Often, as they’re finalizing one deal, they’re thinking about their future expansion strategy. Many DSCR products come with a cash-out option, providing the equity these borrowers need to grow their portfolios.

Many property investors, following their accountant’s advice, continually swap properties for a tax advantage through a 1031 exchange. These transactions allow a borrower to sell one property and buy a “like-kind” property within a specific time frame. This swap enables the investor to defer capital-gains taxes. A DSCR loan is easy to do and quick to close, which is helpful in meeting the time requirements for a 1031 exchange.

Still other investors with particularly complex paperwork are attracted to the more compressed timeline inherent to DSCR loans. For example, if they’re in a rush to acquire a short-term rental in the Rockies in time for ski season, they simply don’t want the transaction to be delayed by intensive documentation and a protracted underwriting process.

Qualifying cash flow

When mortgage brokers and their nonqualified mortgage (non-QM) lender partners qualify investors and properties, they focus primarily on projected cash flow. Will the property or properties they’re purchasing provide enough income to cover the mortgage and other recurring costs?

To answer this question, they do some simple math. First, they calculate the investor’s monthly gross rental income, based on the lower of two measurements. The first is the 12-month average of short-term rental income, while the second involves the comparable market rent from either Fannie Mae Form 1007 (for a single-family property) or Form 1025 (for properties with two to four units).

This number is then divided by the investor’s expected monthly expenses, also known as PITIA (principal, interest, taxes, insurance and homeowners association fees). The quotient represents the investor’s debt-service-coverage ratio.

If the ratio is 1.0 (i.e., breaking even), the lender can expect that the borrower will have the funds to repay the loan. A ratio that exceeds 1.0 indicates positive cash flow even after accounting for monthly expenses. These numbers will factor into a lender’s final decision and the terms they offer. Some non-QM lenders will provide DSCR loans to investors whose ratio is less than 1.0, if they have other assets to compensate for a shortfall.

Terms and requirements for any of these loans will vary by lender. Common ones include a maximum loan-to-value ratio of 80%, six months of reserves held in a federally insured U.S. bank, or the ability to vest through a limited liability company or corporation.

Get the business

The question remains: How can brokers leverage opportunities to meet a property investor’s specific needs while keeping their loan pipeline flowing?

First, brokers should build their referral networks with a focus on investors and industry peers. Realtors, attorneys, accountants, financial advisers and builders are all excellent referral sources for real estate investors. This is especially true in areas experiencing high annualized rent growth, such as Boston; Hartford, Connecticut; Providence, Rhode Island; Cincinnati; and Chicago.

Second, jump on every chance to build partnerships. The minute that new construction breaks ground, it’s time to call the builder or Realtor involved and offer to help them quickly move every residential unit through a streamlined cash-flow lending process. Speed is important to a Realtor’s investor clients and they need DSCR lending experts who can help them provide quick service.

Make sure to partner with experienced non-QM lenders with a strong track record in DSCR loans. Longevity, dedicated expertise and a focus on true channel-based partnerships are valuable qualities in a lending partner. Look for companies that offer education and training, scenario-desk resources, and assistance with marketing, prospecting and joint presentations to Realtors and other referral partners.

As new investment properties continue to reshape the real estate market, brokers who master DSCR loans stand to benefit in multiple ways. They’ll increase their number of referrals and repeat clients — and ultimately their profits. ●

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More often than not, you’re competing with other mortgage originators who offer the same conforming loan products. That’s why it’s crucial to think about offering innovative loan products that get the attention of real estate agents. Not sure where to begin? Here’s how you can stand out from the competition and connect with more agents in the coming months.

Flexible programs

Although homebuyers may want to make a traditional bank their first stop for financing, that isn’t always the right choice. Sure, the rates may be lower in some cases, but this comes at a cost. Strict guidelines paired with even stricter loan products make it difficult for an agent’s nonbankable clients to find a loan. That’s where you come in.

Since all homebuyers have unique mortgage needs, it’s important to offer programs that give today’s buyers more flexibility than conforming lenders are willing to offer. How can you do that? By affiliating yourself with lenders that offer a full suite of alternative loan products. Real estate agents want to work with originators who are well connected and have access to a wide range of products that may better fit their clients’ financing needs.

Take, for example, a self-employed borrower. They may be creditworthy and have a successful business venture, but because their tax returns may not reflect actual cash flow, banks and other traditional lenders are hesitant to give them the green light for funding.

When this occurs, a real estate agent will want to team up with an originator who can offer a unique solution that will give them the “yes” their clients want to hear. For example, working with a lender that offers 12- or 24-month bank-statement loans will enable you to offer the borrower a program specifically suited for their unique needs. Strengthening your lender partnerships will help you diversify your loan offerings while making you a go-to source for out-of-the-box solutions.

Diverse products

It’s no secret — the demand for nonqualified mortgages (non-QM) is skyrocketing and is expected to continue growing in the near future. While qualified mortgages may work in some situations, non-QM loans offer more flexibility in terms of buyer qualifications and loan terms.

It’s key for you to partner with lenders that have robust non-QM offerings. By adding these to your portfolio, you’ll have more options for real estate agents and their clients. Most importantly, they’ll feel more confident that their deals will actually close when they partner with you. Three non-QM products in particular that can have an impact today are bridge loans, non-warrantable condominium loans and foreign-national loans.

If a seller has the choice between an offer that’s contingent on the buyer selling their current residence and an offer that isn’t so contingent, chances are they’re going to pick the latter. Unfortunately, this makes it difficult for the majority of real estate agents who are working with buyers shopping for homes today.

In these cases, you can offer bridge financing to help agents secure their deals. The way it works is simple: Buyers can access equity from their current home to purchase a new home. These are short-term loans (typically one year) that are repaid when the property sells or at the end of the term, whichever comes first. Some bridge financing programs come with no monthly payments or prepayment penalties. This is a huge advantage over hard money loans. The best part is that it allows a real estate agent to help a buyer gain a competitive advantage by making a noncontingent offer.

Besides dealing with a cooling market for single-family homes, real estate agents are also facing challenges in the condo space. Since the 2021 collapse of a condo tower in Surfside, Florida, Fannie Mae and Freddie Mac have tightened their restrictions on condo lending. Buyers must now answer a lengthy questionnaire about the unit’s structural integrity. If this form is filled out incorrectly, the deal is likely to be thrown out.

As a result, agents have experienced major fallout in condo loan demand. For these scenarios, you can offer a nonwarrantable condo solution, which allows a buyer to enjoy more flexibility and less stringent underwriting requirements. This gives real estate agents an alternative way to secure these types of deals.

In markets like Miami and New York, agents are often working with individuals from foreign countries, not just U.S. citizens. The problem here is that these buyers have limited financing options through conforming lenders.

To help real estate agents and their clients overcome this financing obstacle, you can offer a foreign-national loan product. With this mortgage program, a foreign credit report is accepted, and buyers are not required to provide domestic tax returns or credit reports. Incorporating a product like this into your offerings will help you reach even more agents who need help in securing financing for foreign nationals.

Readily available

Nowadays, it’s not enough for originators to work the usual 9 to 5, especially when refinance scenarios are scarce and you need to rely more heavily on purchase money business. It’s smart to go the extra mile, particularly with real estate agents, who are on the clock on weekends.

Think about it: Agents are often taking their clients to open houses on Saturdays. For this reason, consider making yourself available for an hour or two to answer any questions they may have about financing needs.

If you want to expand your network, another avenue is to offer to attend an agent’s open house in their place. That way, you have an opportunity to talk to potential clients in person. It’s a win-win for both you and the agent.

As the mortgage industry shifts, it’s important to keep up with the newest loan solutions and trends that make sense for homebuyers in today’s environment. Deeper partnerships with real estate agents will undoubtedly help you build your pipeline with new contacts, taking your business to the next level in the coming year. ●

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