The result is a relatively new breed of real estate: condo hotels or condotels — an incredibly lucrative business opportunity for investors and developers alike. What is a condotel and how does it differ from the traditional condominium?

“Navigating the intricacies of condotel financing requires a strategic approach that includes consideration of different financing options, property locations, management companies and local laws.”

When it comes to real estate investments, two of the most popular options that come to mind today are condos and condotels. While each offer attractive investment opportunities and give owners the freedom to live in a unit or rent it out, there are important differences for mortgage originators to understand before delving into the world of condotel financing.

Unique characteristics

A condotel is essentially a condominium that operates as a hotel. It is typically a five-star complex with hotel-specific infrastructure such as restaurants, bars, spas, beauty salons, swimming pools and conference rooms. Like hotels, condotels are managed by an operator, but some if not all units are owned by individuals rather than the management company.

Investors do not buy blocks of shares but separate units — studios or apartments with several rooms and a kitchen, which can be used as temporary accommodations or rented out. Condotels are often operated by qualified managers under a single brand — including chains like Four Seasons, Hyatt and Hilton.

In addition to owning their units, condotel owners benefit from the provision of hotel services such as housekeeping, maintenance and rental management. In a condominium building, on the other hand, the unit owners collectively manage the property through a homeowners association.

Since condominiums are viewed as residential properties, they can be financed more easily with traditional mortgages. Financing a condotel, however, is more challenging because lenders often classify them as commercial properties. This requires an alternative option such as a commercial loan or special-purpose program.

Owners of condotel units are subject to restrictions on how long they can reside in the complex. The management contract specifies the amount of time the owner may stay at the property. This is usually about four weeks per year. The rest of the time, the units are rented out.

Preferred destinations

Combining the features of a hotel and a condominium, condotels have become a preferred option among people who seek a hotel-like experience along with the comfort and privacy of a home. The first condotels appeared in Miami in the 1980s.

Condotel owners can benefit from excellent rental yields as well as capital appreciation. Because condotels are often found in prime tourist destinations, such as beachfront or downtown areas, these desirable locations tend to experience high demand, which can drive up property values over time. Furthermore, condotels offer a hassle-free investment option for those wishing to enter the real estate market without taking on property management responsibilities.

For a private investor, buying a condotel unit is generally a low-risk investment. These types of properties tend to be high quality and in high demand. Often, all of the apartments are sold out before the construction of the building is complete. The hospitality chain that owns the condotel controls compliance with all standards during construction, and it ensures that all necessary documents are certified by legal and financial organizations.

Financing intricacies

Condotel loans function similarly to traditional mortgages, but there are a few key differences to consider. Lenders evaluate the property’s financial performance, occupancy rates and the management company’s track record before approving a loan.

Borrowers may need to meet specific requirements such as higher credit scores and downpayments (20% to 30% of the purchase price). This is due to perceived risks associated with condotel investments. Condotel borrowers may face higher interest rates or different terms and conditions (e.g., a condotel unit must be managed by an approved hotel management company).

When it comes to choosing the right type of loan for condotel financing, borrowers have several options, but nonqualified mortgages (non-QM) provide the most options and flexibility. Non-QM loans cannot be purchased by the government-sponsored enterprises or federal agencies.

One popular non-QM choice is the debt-service-coverage ratio (DSCR) loan. With these programs, lenders evaluate the property’s income potential to determine the borrower’s ability to repay the loan. This is particularly beneficial for condotel buyers who intend to generate rental income from their property.

Another option is the bank-statement loan program. This allows borrowers to qualify for a mortgage by using their bank statements as proof of income, making it ideal for self-employed individuals or those with unconventional sources of income. This flexibility can be especially helpful for condotel buyers who may have unique financial situations.

Profit-and-loss mortgages can also be advantageous for condotel financing, especially for individuals with diverse income streams. These loans are designed for borrowers who own a business or multiple investment properties. Lenders analyze the borrower’s profit-and-loss statements to determine their income stability and ability to repay the loan.

Industry network

While condotel loans offer a range of benefits, they also come with their fair share of challenges. One of the primary challenges is finding a lender that specializes in condotel financing.

Unlike conventional financing, condotel loans have limited availability in the mortgage market. Mortgage brokers with a strong industry network can help clients identify lenders that specialize in this niche market and effectively navigate the complex landscape.

Condotel loans often carry higher risks for lenders compared to conventional residential mortgages. As a result, lenders tend to impose stricter requirements and be more cautious when underwriting these loans. Determining the value of a condotel can also be challenging due to the property’s dual nature as a residential unit and a commercial establishment.

Accurate appraisals must consider rental-income potential, projected occupancy rates and revenue streams. Mortgage brokers should work with experienced appraisers who are authorized to evaluate condotel properties, enabling borrowers to obtain a fair and accurate appraisal that is essential for loan approval.

Condotel financing requires an understanding of the unique business model underlying these properties. This includes analysis of the revenue potential, vacancy rates, resort management fees and the overall success of the property’s rental program. Prior experience and knowledge in this area is instrumental in securing favorable financing terms.

Thorough research

Navigating the intricacies of condotel financing requires a strategic approach that includes consideration of different financing options, property locations, management companies and local laws. The various non-QM financing options available should be thoroughly researched and evaluated.

It should be noted that different lenders will have specific criteria for financing condotel properties. By considering various options, you can identify lenders that specialize in condotel financing and are willing to work with such buyers.

Condotels located in popular tourist destinations, business centers, transportation hubs or areas experiencing rapid construction activity are more likely to attract buyers and vacationers, thereby generating higher returns. Lenders consider the investment potential of the property when determining the financing terms and conditions. Locations with a stable and growing real estate market should also be considered. This reduces the risk of property depreciation and loan default.

Efficient property management is essential for maximizing returns on condotel investments. Strong property management ensures proper maintenance, marketing and guest services, leading to higher occupancy rates and increased rental income.

Condotels, with their unique characteristics, may be subject to specific legal considerations. These include zoning and land-use regulations, licenses and permits, tax and insurance implications, and condo association rules such as restrictions on rentals or operational limitations. They may also include requirements related to various aspects of the financing process, such as downpayments or interest rates. Since all of these regulations and requirements can vary from one jurisdiction to another, it’s important to know the local laws.

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As the real estate landscape continues to evolve, the condotel phenomenon offers a unique blend of luxury, convenience and profitability. For those willing to embrace the challenges and complexities, condotels can open the door to a new and lucrative dimension of real estate investing.

With the right knowledge and a strategic approach, mortgage brokers can turn their clients’ dreams of owning a fully serviced accommodation with the potential for high rental yields into a reality. Equip your clients with the information and strategies outlined here to help them embark on a journey that could redefine their real estate portfolio and financial future. ●

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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. ●

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A lack of awareness about financing options for foreign national buyers with little or no U.S. credit history might explain why these newcomers wait two to three years to establish credit before buying a house, and why nonresident buyers often make all-cash purchases. Recently, there has been growth in creative mortgage programs for foreign nationals who lack credit in the U.S., including recent immigrants with visas as well as nonresidents.

“Recently, there has been growth in creative mortgage programs for foreign nationals who lack credit in the U.S.”

Certainly, mortgage originators will face some challenges working with foreign nationals, such as language barriers, limited credit histories and currency exchange rates. But these obstacles can be mitigated by working with a lender that’s accustomed to these borrowers and has programs designed specifically for them. With the COVID-19 pandemic worries waning and international travel returning to pre-pandemic norms, now is the perfect time to start working with more foreign national buyers.

Sizable market

The National Association of Realtors (NAR) recently released a report that details the number of transactions by international clients who purchased U.S. residential property during the 12-month period ending in March 2023. Foreign nationals spent $53.3 billion on residential real estate during the year. This figure accounted for 2.3% of the $2.3 trillion in U.S. existing home sales.

The number of purchases by foreign nationals totaled 84,600, which is the lowest level since NAR began tracking these purchases in 2009. Still, these buyers purchased 1.8% of the 4.73 million existing home sales that occurred during the year. The following represents the countries with the most foreign buyers and their total dollar volume of sales activity:

• China: 13% of foreign buyers, $13.6 billion
• Mexico: 11% of foreign buyers, $4.2 billion
• Canada: 10% of foreign buyers, $6.6 billion
• India: 7% of foreign buyers, $3.4 billion
• Colombia: 3% of foreign buyers, $0.9 billion

These foreign buyers most frequently purchase properties in Florida, California, Texas, North Carolina and Arizona. Buyers from some countries tend to purchase in specific states. For example, those from China prefer properties in California.

Clearly, there is a sizable pool of foreign national buyers who are in the market to purchase U.S. residential properties. For the originators who seek to serve them, there are abundant growth opportunities.

Enviable opportunities

America is often the envy of the world for many reasons, but its economic stability and diversity of cultures and nationalities are notably auspicious. The U.S. is truly the world’s top melting pot and many people from around the world wish to purchase homes in this country.

Additionally, many foreign national clients are high net worth individuals who are looking to invest in U.S. real estate as a means to diversify their portfolios. By purposely catering to foreign nationals, mortgage originators can increase their share of clients and expand their business beyond their local market. By tapping into the foreign national market, originators can boost their revenues substantially.

Originators may also have the opportunity to expand their business into related markets. For example, an originator who has established a strong reputation for serving Chinese clients may be able to expand their business into other Asian markets such as Japan, South Korea or Vietnam.

Like all markets, U.S. real estate is cyclical, fluctuating between periodic peaks and valleys. By working with foreign national clients, originators can diversify their base and reduce the risk of relying too heavily on one group of clients. A more diverse client base will also help originators to better withstand market pressures and downturns while reducing their dependence on the performance of the U.S. market.

Consistent referrals

When foreign national clients are satisfied with the services of a mortgage originator, they are more likely to refer their friends and family to him or her. This can result in a steady stream of referrals that can burnish their reputation and expand their business.

To effectively serve foreign national clients, originators must be willing to invest in their own professional development. This may include developing language skills, taking courses, or attending conferences that focus on cross-cultural communication, international business practices or specialized investment strategies. In this way, mortgage originators can establish themselves as reliable and trusted advisers.

The willingness to invest in one’s professional development also pays dividends in other significant ways. There is a need for originators to become sensitive to cultural differences and to understand how business is conducted in different parts of the world. To foster this awareness, originators generally become more flexible and adaptable — attributes that will serve them well with all clients.

Originators may also need to augment their skill set to effectively serve their clients. For example, a foreign national client may require additional assistance with visa and immigration issues, or they might require specialized tax planning strategies.

Originators who can deliver these kinds of expert professional services often enjoy an enhanced reputation. And this can help them attract new clients, secure more business and gain a competitive advantage over those who do not have experience serving the foreign national market.

Expanded access

One of the primary benefits of working with foreign national clients is the ability to access global markets. Foreign nationals often have investments in their home countries and other emerging markets that are not readily available in the U.S.

Originators who work with them can gain access to these markets as well. This can be a significant advantage for originators, allowing them to diversify their clients’ portfolios and take advantage of investment opportunities that can be offered to other clients as well.

Working with foreign national clients helps originators to stay current on international business trends. Many foreign national clients are successful businesspeople who are well versed in worldwide economic affairs. Originators can gain valuable insights into global business activities from them and stay up to date on economic trends that may also impact the U.S. real estate market.

In addition to the U.S. residential real estate market, foreign national clients are often interested in acquiring commercial investment properties. They are generally inclined to make long-term investments, leading to further profitable opportunities for originators.

Originators who work with foreign national clients may also benefit from higher commissions. These clients often have larger investment portfolios and may be willing to pay higher fees for specialized investment advice and management.

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There are many benefits available to originators who work with foreign national clients. From access to global markets and greater investment opportunities to a steady stream of business and potentially higher commissions, originators can enjoy a wide range of advantages.

Additionally, working with foreign national clients can help originators diversify their client base, gain exposure to different investment strategies and enhance their cultural understanding. Ultimately, the mortgage professionals who work with foreign national clients are better positioned to compete in the global market and provide quality service to their clients. ●

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Individuals facing such circumstances often seek assistance from lenders that offer nonqualified (non-QM) mortgages, which are loans that cannot be purchased by the federal government or the government-sponsored enterprises. One of these non-QM products is an option known as an asset utilization loan. Instead of relying on traditional W-2 income, borrowers can apply for this loan by demonstrating that they possess adequate assets to support the mortgage payments.

Assets that commonly meet the qualification criteria for this type of loan include checking and savings accounts, stocks and bonds, mutual and money market funds, income from real estate investments and vested amounts in retirement funds. Annuities qualify, as do some pensions.

For borrowers who possess substantial qualifying assets, asset utilization loans can be considered an excellent financing option for purchasing a home. Mortgage originators should understand this avenue of financing to best serve their clients.

Overall portfolio

Unlike a traditional mortgage that primarily considers W-2 income and the value of the real property, an asset utilization loan considers the borrower’s overall asset portfolio. It is particularly beneficial for individuals or businesses with significant assets but limited income or cash flow.

By leveraging their assets, borrowers may qualify for larger loan amounts, enjoy more favorable interest rates, or access financing that they might not otherwise be eligible for based solely on their income or creditworthiness. The lender assesses the value and liquidity of the assets when determining the loan terms.

To qualify for an asset utilization loan, borrowers must meet specific criteria and provide supporting documentation to demonstrate eligibility. Here are important factors that lenders typically consider.

• Sufficient assets. Borrowers need a significant amount of assets (including investments, stocks, bonds, savings accounts, retirement funds or other real estate) to prove their capacity to repay the loan.
• Asset verification. Documentation is required to verify the existence and value of assets. This involves providing bank statements, investment account statements, property appraisals or other relevant records.
• Asset seasoning. Some lenders may require assets to have a minimum seasoning period, indicating stability and reliability. Generally, this means owning the assets for several months or years.
• Loan-to-value ratio. Lenders compare the loan amount to the appraised value of the property to be purchased. The maximum loan-to-value ratio set by a lender may necessitate a certain level of equity in the property or a larger downpayment.
• Creditworthiness. While asset utilization loans focus more on assets than traditional income, creditworthiness remains crucial. Lenders assess credit scores, credit history and overall financial stability to evaluate repayment ability.
• Debt-to-income (DTI) ratio. Although assets are considered as income, lenders may still assess the DTI ratio, which compares monthly debt obligations to income. A DTI ratio of 43% or lower is often used as a guideline for mortgage qualification.
• Documentation of income and assets. Comprehensive documentation of income and assets — such as tax returns, W-2 forms, 1099 forms, bank statements and other relevant records — is required to verify financial standing.

Qualification requirements

Asset utilization loans are primarily intended for those with good to excellent credit. Although requirements vary from lender to lender, a minimum credit score of 720 is generally needed.

Asset utilization loans can be offered in amounts as high as $3 million, particularly for borrowers with high credit scores. The typical downpayment requirement is 30% of the property’s purchase price, although this percentage may increase for more expensive properties.

Moreover, it is essential that all assets are verified as belonging solely to the borrower, who must have unrestricted access to these accounts. A government pension, for instance, generally cannot be withdrawn and is ineligible as an asset for these loans.

If the accounts are jointly held with other individuals, written permission is required to confirm that 100% of the funds can be utilized by the borrower. Otherwise, the borrower’s available assets will be divided proportionally among all account holders.

Common considerations

There are some pros and cons that should be considered when advising borrowers about these loans. For some clients, an asset utilization loan will allow them to borrow more money than they could have qualified for with a traditional mortgage. This is because some lenders are willing to offer higher loan amounts to borrowers who have an abundance of assets, even if they have lower incomes.

In some cases, borrowers may also be able to get a lower interest rate on an asset utilization loan. This is because, in certain cases, the lender may be assuming less risk by working with a borrower who possesses an extensive investment portfolio.

One of the drawbacks of this type of loan is that the lender may require a borrower to make a larger downpayment compared to a traditional mortgage. The reason for this is due to a lender’s desire to make sure that borrowers have some skin in the game.

To qualify for an asset utilization mortgage, borrowers may need to provide more documentation to the lender than they would with a traditional mortgage. There is inherent risk with any loan, and asset utilization loans require borrowers to pledge their assets as collateral. In the event of default, there is a risk that the borrower could lose the assets or have to sell them at a loss to repay the loan.

Viable solution

Asset utilization loans offer a viable solution for individuals who face challenges obtaining a traditional mortgage due to nonverifiable W-2 income or reliance on investment income. By leveraging their substantial assets, borrowers can potentially qualify for larger loan amounts and benefit from favorable interest rates.

It’s important to carefully consider the requirements and potential drawbacks associated with asset utilization loans. Thorough research of lenders that specialize in asset utilization loans (including a comparison of their terms, rates and fees) is crucial to finding the right fit.

Mortgage professionals can provide valuable support and guidance throughout the qualification process. Ultimately, making an informed decision based on a thorough evaluation of the benefits and drawbacks of asset utilization loans will help borrowers navigate the mortgage financing landscape with confidence. ●

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As a mortgage borrower, it’s essential to have a clear understanding of the risks associated with acquiring property in disaster-prone areas. Natural disasters caused $165 billion in damage in the U.S. in 2022, the third most-costly year since 1980, according to the National Oceanic and Atmospheric Administration (NOAA).

Mortgage professionals should take the time to educate their clients about the potential risks and liabilities associated with purchasing real estate in areas prone to natural disasters. This includes providing information on the specific risks associated with the property, such as flood zone designations or soil liquefaction zones, and helping clients understand the insurance requirements and expenses associated with these risks.

“Owning a home in a high-risk area comes with its own set of challenges — for example, how the potential impact of a natural disaster might affect property values or resale prospects.”

By helping their clients understand the risks involved in acquiring properties in disaster-prone areas, originators can help them make more informed decisions about their investments and avoid any financial pitfalls that may arise. Ultimately, a mortgage originator who truly cares about their clients’ well-being will prioritize education and transparency, providing guidance and support to help them make sound financial decisions that align with their goals and interests.

As trusted financial professionals, loan originators can offer valuable guidance to their clients in these high-risk locations. By understanding the threats, implementing preventive measures, executing emergency preparedness, and being aware of the rebuilding and recovery process, mortgage originators can empower their clients to mitigate risks and minimize potential damages.

Perilous areas

To effectively serve their clients in these risk-prone regions, originators must first have a thorough understanding of the location-specific hazards. Local climate patterns, historic data on past events and the specific dangers posed by disasters prevalent in the region will help originators educate their clients.

They can apprise them of the potential hazards to their home and offer appropriate recommendations. For example, homes in South Florida are part of a weather pattern known as Hurricane Alley. Florida has been hit by twice as many hurricanes as the next closest hurricane-prone state, which is Texas. Of the 308 hurricanes that have hit the U.S. since 1851, 125 have made landfall in Florida, according to NOAA.

“Mortgage professionals should take the time to educate their clients about the potential risks and liabilities associated with purchasing real estate in areas prone to natural disasters.”

Consequently, it behooves originators who work in Florida to be knowledgeable about the frequency and severity of hurricanes in the state, the typical paths these storms follow, and the potential damage caused by gale-force winds, potent storm surges and massive flooding. Originators should also be familiar with local building codes and zoning regulations that are intended to moderate hurricane risks, such as requirements for impact-resistant windows or hurricane straps for roof reinforcement.

Similarly, in tornado-prone areas, originators should be aware of the frequency and intensity of storms in the region, the typical paths they follow, and the possible damage caused by strong winds, flying debris and structural collapse. They should also be familiar with any local tornado warning systems, evacuation plans and emergency shelters to inform their clients accordingly. About 1,150 tornados were recorded in the U.S. in 2022, NOAA reported. Over the past three decades, Texas has seen the most tornados with an average of 150 each year, followed by Kansas at 91 and Oklahoma at 68.

Wildfire-prone areas possess their own disastrous risks. Besides being aware of the frequency and severity of wildfires in their region, originators should understand the typical causes of wildfires, as well as the potential harm caused by raging fires, flying embers and deadly smoke. And they should be familiar with any regulations or guidelines for creating defensible spaces (fire breaks) around homes, along with the use of fire-resistant building materials.

California led the nation with 9,280 wildfires in 2021 and more than 2.2 million acres burned, according to the Insurance Information Institute. Texas recorded the next highest number at 5,576, although only 168,000 acres burned. Oregon and Montana had fewer wildfires (2,202 and 2,573, respectively), but these disasters burned more land — about 828,000 acres in Oregon and 747,000 acres in Montana.

By having a solid understanding of the specific risks posed by extreme weather events where their clients’ homes are located, originators provide crucial services. They can make clients aware of potential hazards, provide reliable resources for weather alerts and updates, help to assess the vulnerability of homes and recommend the necessary preventive measures to reduce risks.

Advanced preparations

For homeowners in disaster-prone areas, having proper insurance coverage is vital. Naturally, homeowners will consult with their own insurance professionals to make sure they have sufficient coverage. But as trusted advisers, mortgage originators can also inform their clients on the necessity of insurance coverage that specifically addresses the risks in the areas where they are buying or refinancing a home.

Originators can also educate their clients about the different types of insurance coverage (including homeowners insurance, flood insurance and windstorm insurance), and help them understand the limitations, deductibles and exclusions that may apply to these policies. They can advise homeowners on the importance of regularly reviewing and updating their insurance coverage to ensure it is adequate for protecting their homes and belongings against potential risks.

Given their broad real estate expertise, mortgage originators can also advise their clients on the wisdom of preventive measures. They can stress the importance of reinforcing roofs, installing impact-resistant windows and doors, and securing loose objects in the yard.

 They can also educate their clients on the importance of having a disaster preparedness plan in place. This might include emergency supplies such as food, water, flashlights, batteries, candles, a portable generator and a first-aid kit. It is also important to have detailed evacuation and family reunification plans in place, and to know the exact location of the nearest emergency shelter.

Finally, originators can suggest that homeowners set aside a financial emergency fund to help with unexpected expenses in the event of a disaster. This can include expenses such as deductibles, repairs, temporary housing and other unforeseen costs that may not be fully covered by insurance.

Informed decisions

If a homeowner’s property is damaged or destroyed by a natural disaster, originators can offer their clients assistance in the rebuilding and recovery process. This might include working with insurance companies to file claims, or negotiating any challenges or disputes that may arise during the claims process.

Originators can be a good source of information on available assistance, such as government relief programs, disaster recovery loans and other forms of financial aid. Additionally, originators can help homeowners understand the implications of rebuilding or repairing a home in a high-risk area. For example, homeowners may be required to comply with updated building codes or regulations intended to reduce the risks of future natural disasters. Originators can help homeowners analyze the potential costs and benefits of complying with such regulations.

 After a disaster, it is also important for homeowners to conduct thorough inspections and assessments of their homes to identify any potential structural or environmental hazards. Originators can counsel clients about this process to ensure that a home is safe before moving back in or initiating repairs.

Owning a home in a high-risk area comes with its own set of challenges — for example, how the potential impact of a natural disaster might affect property values or resale prospects. In these zones, it might be more difficult to sell a home due to lower demand, or there might be increased insurance costs. There could also be a stigma associated with the region due to its history of disasters. By providing insights into these factors, originators can assist homeowners in making informed decisions about their long-term plans and exit strategies.

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In addition, originators can be an invaluable conduit to other experts in their respective fields. These might include insurance agents, contractors, inspectors and disaster preparedness specialists. These kinds of referrals can help homeowners connect with professionals who can provide specific advice and assistance tailored to their unique needs and circumstances. ●

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More recently, the housing market has slowed somewhat and price growth has cooled a bit. But despite the ravages of high interest rates and inflation, home prices had not declined in any meaningful way as of this past spring. In fact, according to one estimate, the share of homes valued at more than $1 million has nearly doubled since the start of the pandemic to a rate of one in 14 homes.

“The number of million-dollar homes in the U.S. has risen substantially. In 2015, there were approximately 2 million homes worth $1 million or more. By 2021, this figure had grown to 4.2 million homes.”

The availability of jumbo mortgages has helped to fuel the growth of the luxury home market in several ways. For one, it has allowed buyers to access the funds they need to purchase high-end homes without having to rely on personal savings or other sources of financing. This has made it easier for individuals and families to enter the luxury home market, which was previously reserved for only the wealthiest buyers.

In addition, jumbo mortgages have helped to spur the development of new luxury homes and communities. Developers are more likely to take on these projects when they know there are plenty of buyers who can afford to purchase them. The availability of jumbo mortgages has therefore created a virtual cycle in which the growth of the luxury home market has led to more demand for jumbo mortgages, which in turn has led to more development of luxury homes and communities.

Rising values

The number of million-dollar homes in the U.S. has risen substantially. In 2015, there were approximately 2 million homes worth $1 million or more. By 2021, this figure had grown to 4.2 million homes, according to census data. Although luxury home sales plunged on a yearly basis this past winter, they increased from February to March by nearly 50%. The Institute for Luxury Home Marketing expects prices and demand to fluctuate in the near future as the economy shakes out.

Still, the million-dollar home market has grown significantly over the past few years. About 7% of all homes in the U.S. were valued at $1 million or more in January, according to Redfin. That’s down from an all-time high of 8.6% in June 2022, but it’s much higher than the 4.2% pre-pandemic rate. In the areas with the largest numbers of million-dollar homes, the percentage increases have been staggering.

“The primary advantage of a jumbo mortgage is that a borrower can qualify for a larger loan amount, which means they can purchase a more expensive home without having to come up with additional cash.”

The highest concentrations of million-dollar homes are in the states of California, Hawaii, Washington, New York and Massachusetts. In California and Hawaii, about 23% of all homes are worth $1 million or more. In the Pacific Northwest, million-dollar homes are most prevalent in the Seattle area and the surrounding suburbs of Bellevue and Kirkland. In Bellevue, 60% of homes are priced at $1 million or more, while in Seattle, the share is 33%.

While these are eye-popping numbers, there are three cities in California with even higher concentrations of million-dollar homes. In Pleasanton, Sunnyvale and San Francisco, these percentages exceed 70%. With such a dramatic increase in recent years in the number of million-dollar homes, the question becomes, who is buying these homes, how are they being financed and how is this trend affecting the housing market at large?

Wealthy buyers

Of course, buyers come in all shapes and sizes, and their capacity to afford a million-dollar home depends on their personal financial circumstances. For example, an individual or couple might generate a substantial income but not have much in the way of a downpayment. Conversely, a buyer might have a large downpayment while earning less monthly income.

If you assume a standard downpayment of 20% (which amounts to $200,000 on a million-dollar home purchase), then the buyer would have a mortgage balance of $800,000. If you further assume that their mortgage balance should not exceed 25% of their pretax income, then a household would have to generate at least $200,000 annually to support their purchase.

Most Americans do not earn $200,000 or more per year. As a result, there is often a differential in some areas between the number of available million-dollar homes and the number of households that can afford them.

Despite this affordability gap, many housing analysts expect the share of million-dollar homes to continue to grow. They attribute this trend to an influx of wealthy buyers seeking to invest in luxury properties, as well as a steady rise in property values in certain affluent areas of the country.

Financing solution

Every year, the Federal Housing Finance Agency (FHFA) determines the conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac. In 2023, the loan limit for single- unit properties is $726,200 in most areas of the U.S., an increase from $647,200 in 2022.

In designated higher-cost regions of the country, the new ceiling for one-unit properties is $1,089,300, or 150% of $726,200. Practically speaking, in most parts of the U.S., buyers who want to purchase a luxury home ($1 million or more) with a conforming loan are precluded from doing so because of the existing loan limits of $726,200. In all likelihood, these buyers will seek out a jumbo loan to fund their purchase. Jumbo loans exceed the FHFA guidelines and cannot be purchased by Fannie or Freddie.

Even in the designated higher-cost regions of the country, buyers who wish to purchase a higher-priced luxury home (say $1.5 million and above) are also likely to fund their purchase with a jumbo loan, given the new limit of $1,089,300. The primary advantage of a jumbo mortgage is that a borrower can qualify for a larger loan amount, which means they can purchase a more expensive home without having to come up with additional cash for a downpayment or closing costs.

Additionally, jumbo loans often come with competitive rates and some may even have lower rates than conventional loans. That’s because lenders are less exposed to risk since they don’t have to meet certain requirements set by Fannie Mae or Freddie Mac. Here are some other general guidelines for jumbo loans:

• Minimum downpayment of at least 10%, although some lenders require up to 30%.
• Minimum credit score of at least 700, although some lenders have a higher interest rate option for borrowers who fall just short.
• Debt-to-income ratio varies by lender, but it’s typically 38% to 43%.
• Cash reserves of six to 18 months can be required of the borrower.

For borrowers who need a loan that is higher than the federal limits, who are high-income earners, have extremely strong credit and wish to finance a luxury home (or a home in a highly competitive area), they should seek out a jumbo loan from a qualified mortgage lender. It is the financing option that will most likely make the purchase of their dream home possible.

Favorable conditions

Jumbo loans recently experienced an uptick in borrower demand due to their favorable interest rates, according to Black Knight. The pressures of escalating mortgage rates and the affordability of homes combined to drive down the number of rate locks in February 2023 compared to the previous month.

Actual dollar volume rose, however, because borrowers took advantage of the preferred rates for jumbo loans and adjustable-rate mortgages (ARMs). As rates remain elevated, borrowers have responded predictably by moving toward more advantageously priced offerings. This includes a shift to jumbos, ARMs and other nonconforming products.

Overall, the availability of jumbo mortgages has been a positive development for the luxury home market. It has allowed more individuals and families to enter this segment and has helped to spur the development of new luxury homes and communities. As the real estate industry continues to evolve and grow, it is likely that jumbo mortgages will continue to play an important role in the purchase of higher-priced homes. ●

The post The Allure of Luxury appeared first on Scotsman Guide.

Not all borrowers, however, are able to provide the documentation that is required to qualify for a conventional loan. This is especially true of self-employed individuals who lack a W-2 income. In these cases, a borrower who wishes to purchase a home seeks out a nonqualified mortgage (non-QM) lender that has more flexible underwriting guidelines and specializes in working with self-employed borrowers. Non-QM loans are those that cannot be sold to the federal government or the government-sponsored enterprises.

One particular subset of self-employed individuals who frequently work with non-QM lenders are real estate investors. Because many investors take deductions and write off business expenses on their properties, they do not qualify for conventional loans. Instead, they work with non-QM lenders that offer mortgages based on the potential income that an investment property can generate, rather than the income of the investor.

One primary calculation that lenders use when evaluating an investment property is to determine its debt-service-coverage ratio (DSCR). This ratio helps the lender to ascertain whether the property is generating sufficient income to service the loan debt. Mortgage originators can help clients who want to invest in real estate by understanding these types of products, which are referred to as DSCR loans.

Calculating income

To assess the real estate investor’s ability to repay, the lender calculates the debt-service-coverage ratio. This ratio compares the annual gross rental income with the anticipated mortgage expenses, such as principal, interest, taxes, insurance and homeowners association fees — omitting only utility fees.

By doing so, the lender makes sure that the borrower has enough coverage within their revenue streams to cover potential debt liabilities over time. To calculate the DSCR, an investment property’s gross rental income is established.

Generally, this figure is based on a lease agreement and/or an appraiser’s comparable rent schedule. The lesser of the two figures is typically used to calculate the ratio. Next, it is necessary to determine a property’s annual debt. For loan qualification purposes, the annual debt includes the total principal, interest, taxes and insurance. Finally, the annual gross rental income is divided by the annual debt and that calculation yields the DSCR.

For example, an investor may be looking to buy a home that has a monthly rental income of $2,500 and debt payments of $2,000. When you divide the rental income by the debt payments, you get a DSCR of 1.25. This means that the property generates 25% more income than it costs to own.

Lenders formulate a borrower’s DSCR to ensure that an investment property has sufficient income to service its debt. It is also a way for lenders to evaluate the merits of a prospective loan and a means to mitigate its risks.

Assessing risk

Typically, lenders want to ensure that borrowers can cover current debt obligations without taking out additional loans, which is reflected in a debt-service-coverage ratio of 1.0 or higher. Anything less than this could signal that the borrower has insufficient funds flowing through and may need external resources for repayment.

Even if the DSCR is close to 1.0 — say 1.1 — some lenders might consider the property to be financially vulnerable, since a minor decline in cash flow could render it unable to service its debt. Consequently, some lenders may require borrowers to maintain a minimum DSCR throughout the life of a loan. Other lenders may deem a loan to be in default if it falls below an agreed-upon minimum ratio.

Although there is some variation among lenders, most are willing to make DSCR-based loans with a ratio of 1.0 or higher, while some lenders are even willing to make loans with a ratio below 1.0. Even if they generally frown on negative cash flow situations, some lenders are willing to consider them, depending on a property’s particular circumstances.

For example, loans with ratios below 1.0 are usually purchase loans that involve home improvements or major remodels that will be made to increase the property’s monthly rent. In addition, a DSCR loan with a low ratio might be granted on a property with substantial equity or the potential for higher rents in the future.

It should be noted that interest rates on loans with ratios of 1.0 or higher are generally more favorable, while a DSCR ratio of less than 1.0 generally requires 12 months of reserves. Non-QM lenders that offer DSCR loans are experienced in working with real estate investors and can develop pragmatic solutions to the benefit of both lender and investor alike.

Benefiting borrowers

DSCR loans are good for both new and experienced real estate investors. If they’re new, this loan can help them get started. If they’re experienced, the proceeds can give them the money they need to grow their wealth.

So, whether they’re just starting out or they’re seasoned pros, a DSCR loan is a good way to finance real estate investments. There are many other benefits for investors who utilize DSCR loans to fund the purchase of investment properties:

• Personal income. DSCR lenders do not look at a borrower’s personal income during the application process, making it easier to qualify with lower levels of income.
• Time to close. With a DSCR loan application, a borrower’s financial information is not required and employment gaps needn’t be explained — resulting in a smooth, swift process from application to closing.
• Multiple properties. DSCR loans allow clients to borrow money for multiple properties at the same time. This is different from other types of mortgages, which require borrowers to pay off any existing loans.
• Unlimited cash out. With the DSCR loan, your borrower can have peace of mind knowing they are able to access as much cash flow as needed for any unforeseen circumstances. This unlimited cash-out option offers a smart alternative when looking into convenient and reliable loan options.
• Foreign nationals. Non-U.S. residents are eligible for DSCR loans. Typically, the maximum loan-to-value ratio is 80%, so foreign nationals need to put down at least 20% of the property’s purchase price to be financed with a DSCR loan. These loans may include higher interest rates and fees, and the applicant will need to provide proof of income from the rental property.

An impressive debt-service-coverage ratio is the key to proving there is enough cash flow on hand to cover the loan payments. A higher ratio means better financial security, so if you want the comfort of knowing your borrower’s debt can be serviced without difficulty, aim for the highest ratio possible.

DSCR calculates whether an investment property is making enough money to cover the mortgage or not. It is an effective gauge for non-QM lenders to determine the maximum loan amount on an investment property. ●

The post Did Your Client Catch the Real Estate Investment Bug? appeared first on Scotsman Guide.

While a 40-year mortgage generally makes monthly loan payments more affordable in the short term, it is not without some risks.

Lender variations

Borrower fit

The post The 40-Year Mortgage Gains Traction appeared first on Scotsman Guide.

• Inflation: In January 2021, the annualized rate of inflation was 1.4%. By January 2022, this figure had soared to 7.5%. And by September of last year, it was 8.2%.
• Interest rates: In January 2021, the average rate for a 30-year fixed mortgage was 2.74%, Freddie Mac reported. A year later, it was 3.45%. As of early November 2022, it was 6.95%.
• Home prices: In first-quarter 2021, the nationwide median price for all types of existing homes was $369,800, according to Federal Reserve data. In Q1 2022, it was $433,100, and by Q3 2022, it was $454,900.

Higher wages and material costs for new construction have led to significant declines in housing starts and renovation projects. All of these factors, naturally, have taken a toll on mortgage lenders.

In the conventional market, all lenders are on a level field during tough market cycles.

Turbulent times

Bleak conditions

Financial paradox

Advantageous guidelines

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For millennials, technology and service are inseparable. The method for delivering service — the app, the website, the portal, the platform — is essential in determining what will drive their loyalty.

Difficult decision

Competitive advantage

Millennial factor

Careful consideration

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