Creative ways to finance a home in MA

One of the things that I do as an agent is network with lenders.

Not that I hope to get business from them through a friendship (if it happens that way, I don’t complain), but for the essential need to keep up with their product offerings.

What are their interest rates for a 30-year fixed rate conventional loan? What about it at 15-year and 10-year? And the rates for an Adjustable Rate Mortgage (ARM) – at 10 years, 7 years and 5 years? Any new standout portfolio loans? Anything else to update me?

Basically: “Why you? Why should I send my client your way?”.

I let them remind me of their elevator pitch and assess their hustle.

Those who say “I offer a variety of loan products and can beat any rate”, I eliminate; because that’s not being outstanding- that’s being basic and not knowing your own UVP.

In my career I’ve met but a few lenders who get it. They know that I’m looking to pair my client with the right lender and don’t bother telling me that they can pretty much do it all.

Top of the list of lenders who articulate their value exceptionally well is a certain lender whose name I’ve been advised not divulge because doing so would mean that I need to send this email to his office for compliance checks prior to publishing.

Red tape my blog? Pass. 

I was referred to him by another lender because I had clients who wanted to purchase a house for a tear down followed by a new home construction.

This guy is no vanilla lender. His specialty is in unique loans.

Case in point on the “buy to tear down and build a new house” scenario - many agents are unaware that buying a house to demolish in order to build a new house on the land, is not covered by the new construction loan. That was me 😅 I thought that my clients’ interest to build a new house naturally fell into the new construction home loan category. 

New construction loans are for homes that are in the process of being built. The Seller (usually a builder) would have building permits, plans and a delivery timeline in place for a new house.

To buy a house for demolition does not fall under conventional new construction loans because buyers are essentially telling the lender to lend on an asset only to demolish the mortgage collateral. 

So, you find folks like Mr Unique Loans Lender who have access to non-conventional loans and who could – hopefully – solve your snag. 😎

Anyway, back to my point about his ability to articulate his value. He does so through writing – an email update about a scenario that he’s encountered in his week and how he’d been able to get it resolved, sent religiously every Sunday morning since May 2021.

I read them all. He writes well and they are interesting stories! It’s the one marketing email that I never delete because I know there’ll be a day that I’d draw on that knowledge for my clients.

Guess what? 1.5 years of receiving his weekly emails after, I’m ready to share them all with you in this blog post.  

There’s so much to share here so like a book, I’ve organized the content into 7 chapters and fleshed out subsections with applicable scenarios. Go ahead to click on any subsection and it’ll take you to the relevant content!

📖

Ok, fire away!

 

1. Portfolio loans

Common Scenarios to portfolio a loan

There is a very real sense in which most portfolio loans are unique. So it’s a mistake to put things in tight little boxes. That said, it’s hard to think without categories, so here are a few ideas that may give you a sense for times when you might want to give me a call:

International clients – with a high down payment (typically 40%), we will consider loans to clients who live and earn their income overseas. This is often parents helping a child buy a condo while in college or shortly after, but also includes things like second homes here in the US. We have occasionally done investments in this program, but it is typically for owner occupants. 

Short term 1099s – these are people who have moved to being paid on a 1099, but who don’t have the two year history required for conventional. I have seen a lot of these since the pandemic – dentists, HR execs, recruiters, tech people, etc –  who were laid off because their companies didn’t need their role last year and who found new employment on a contract basis. A conventional loan will require a two-year history of income.

Divorcing clients – Conventional loans require all sorts of things that divorcing clients often lack – six months’ receipt of support income, for example, or a two year work history. The asset depletion idea from the prior email is also a big help – imagine someone who has been stay at home but got a lot of money in the split of assets. It’s not uncommon that they take a part time role as they return to the workforce, and the asset depletion income can help them qualify.

Self employed – a million little things here, but we can often view income or business circumstances differently than a conventional underwriter would, and it helps get loans closed.

Non-warrantable condos – here, the property has an issue because it doesn’t fit conventional guidelines. These are all over downtown Boston – associations in litigation, first unit in on a new development, high concentration of ownership by one entity, etc. We will review the situation and, if we can see that it makes sense, do the loan.

Doctor loans – we offer a no money down loan to early career physicians. This is very helpful for new residents who haven’t had time to save up a down payment.

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Not on W2 / Recently moved from W2 to 1099 tax filing

There are many professions where some people work on a W2 as employees and some work on a 1099 as self-employed contractors. Think recruiters, set designers, biotech specialists, consultants – lots of fields with project-based work, where a particular engagement may not last a long time.  

What often happens in these fields is that people bounce from 1099 to W2 and back as they go from project to project. As they may have four or five different projects in a year (often with gaps in between), their loan applications often get them tangled up with employment stability guidelines – maybe they hear that they need to show two years of being on 1099, or maybe an underwriter wants to see them stay six months as one W2 position. And they get shocked by this, because they see themselves as highly paid specialists with jobs all over the place to choose from.

These are some of my favorite scenarios to present for portfolio loans because I can make a good, common sense story for their ability to earn an income. Usually, it sounds very much like what they say themselves when they get mad about qualifying – something like “Look, they have been doing this for years, and when they took this current role they had three different offers to choose from. They took the 1099 because it paid them more – wouldn’t you do the same!”. Maybe I present 1099 income with some sort of haircut – counting 75% of income, for example, to offset concerns that we don’t have tax returns showing writeoffs for this particular role. Maybe I show some of their discussions about future contracts, etc.

The basic concept is that a portfolio loan is a “make sense” loan. We are taking our depositors’ money and lending it to someone because we believe they are a good credit risk even though they don’t fit standard guidelines. So a quick test of whether someone is a good candidate is whether you would lend them your own money. If you would, it’s probably something we’ll consider. But if you raise your eyebrows, chances are pretty good that we will also.

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In the midst of a divorce 

About a month ago, I got a call from a woman who had just been denied for a conventional loan. She filed for divorce in 2019, but the process became…well, let’s say contentious. And so she was receiving alimony, but under an interim agreement until the divorce was finalized. 

She was denied because the other lender needed to wait for the divorce to become final. I was able to get her an approval for a portfolio loan, and we closed her transaction last week. This was a big deal for her, because it allowed her to own her own place and stabilize her housing situation.

This is a niche where I can really be helpful – basically, there are a lot of divorces that are in this interim stage. If you run into a situation where a client can’t move forward because their divorce isn’t finalized yet, please have them give me a call – I would love to see if I can help. Even if the specific situation isn’t one that I can close right away, I often can give guidance that helps them get to the point where they can buy sooner than they would with another lender.

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Buying real estate in an LLC

It occasionally comes up that a client wants to hold title in an LLC. Usually, this is because they are an investor, and they are advised by an attorney or other person they’re working with to use the LLC for liability protection.

When they go to get a mortgage, they are often surprised to learn that a conventional loan can’t accommodate an LLC – title has to be held personally. But I do have a portfolio loan option that will allow the LLC. It’s pretty straightforward – we will make sure that the LLC is sole purpose, meaning that it’s for the one property only. And we will have them sign personally for the mortgage, meaning that we do have recourse to their personal assets if they don’t pay us. And then they proceed as normal and take title in the LLC.

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2. Combo Loans

Need to reduce/eliminate PMI

When a client is putting down less than 20%, they usually have to pay mortgage insurance. But this can be expensive, so I often look at two main options for avoiding it.

The first is a combo loan. Here, we break the loan into two parts – a first mortgage for 80% of the purchase price, and a second mortgage for the remainder. This works particularly well for people who receive large bonuses or who are selling another property after they purchase – when they receive a large lump sum of money, they can pay off the second mortgage, and it leaves them with a cheaper first mortgage than they would have had otherwise.

The second option is a buyout of the mortgage insurance by paying it up front at the closing. This can be expensive, and it takes extra cash from the buyer. But it entirely removes the cost of mortgage insurance from the monthly payment, and so it can help a lot with qualifying when things are tight. 

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Buying a house before selling

Years ago, I used to originate combo loans to get buyers out of mortgage insurance. This was what we called it when we split a mortgage up into two parts – a first mortgage, usually for 80% of the purchase price, and a second mortgage for the remaining amount. At the time, it was a good solution for clients because it got rid of mortgage insurance.

Then, pricing structures changed, and it stopped making as much sense to do combo loans because Fannie and Freddie started charging more on the first mortgage if there was a second mortgage on top. This wiped out a lot of the benefit of eliminating mortgage insurance. 

But you know how things come back around in different ways if you wait long enough? Now, I’m talking to clients about combo loans when they are going to sell their old home after they buy the new one. It only works if they have enough money to buy before they sell. But I can break the mortgage into two parts, with a first mortgage for the amount they want as a permanent loan, and a second mortgage for the amount that they will pay off when their old home is sold.

Basically, there are a lot of buyers who don’t want to have to refinance after selling their old home, and the combo loan accomplishes that goal.

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 3. Asset Depletion Loans

High liquidity/savings, but insufficient income

There is a technique called “asset depletion” that’s quite handy in getting loans through to the finish line. Basically, if a person has very strong assets, I can give them credit for income. This is typically only available if the asset balances are quite high, which is why it makes sense – if someone has $1M in the bank, for example, it’s not a stretch to think they could handle a $1,500 monthly payment.

Many of the best uses of asset depletion are to boost income. For example, when someone is divorced after caring for children for some years, it’s often the case that they return to work part time or in a reduced job role. Asset depletion income helps me support a mortgage. Or if someone has sold a private company, it may be that they are taking a period where they are not working. Again, asset depletion lets me give them credit for the money they have in the bank.

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 4. Building an alternate credit report

No credit score

Have you ever run into a client with no credit score? It’s more common than you’d expect – think about people who immigrate to the US, who are young or wealthy enough that they haven’t needed to use debt, or who had a bad experience years ago and swore never to borrow again. 

The problem is, with no credit score, the automated underwriting systems have trouble running the loan. So the borrowers often get denied. And many are excellent credit risks.

I love working with these buyers, and I’ve closed many of them over the years. What I do is help them build an alternate credit report. We’ll find something they pay regularly – rent, perhaps, or a utility bill. I’ve used Netflix accounts, private repayment plans for ambulance rides or dental work, insurance payments, etc. And I’ll have them go back a year and show me that they’ve made each payment on time.

Then, I can use this report to go back in and demonstrate that they pay their bills on time. Which is the point of a credit score, anyway. The only catch is that I generally need 20% down for the loan programs I’ll use, so they have to have the money for that level of down payment. 

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Just relocated to the US

Since COVID, I haven’t had the same level of international business that I had pre-COVID. Stands to reason, I guess. But it seems to be picking up a bit recently, and mixed in among the executives being relocated and parents buying for kids going to college here are some people who are US citizens but who have lived overseas for so long that they don’t have US credit any more. 

For these people, I can build an international credit report. In most cases, they will have a credit card that they use for travel, and that gives me one thing to draw upon. From there, I’m going to look for two other things that they pay monthly. This might be their housing payment, their utilities…I’ve even used personal accounts like payments on a kids’ braces in the past. Once these accounts are identified, I’m going to ask them to show that they’ve been on time for the past year. Sometimes, this is simply an account printout; other times, I have to go through bank statements to find cancelled checks for twelve months.

But the point is, I can build a credit report for them and base a loan on it. This means that they can avoid waiting to re-establish US credit, and they can buy right away rather than renting.

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Income is abroad

Foreign national loans are for people who are here on a visa but have income that is overseas. Think about, say, a student who is here on an F1 visa, and they own a business (or maybe their parents do) in another country. So the challenge for a conventional loan is that no income appears on a US tax return. 

I can put together a loan using their international income. Usually, this means documenting the income, building a credit report (because their credit is usually overseas as well), and showing that they have enough assets here in the US for down payment and reserves. 

The main hurdle, assuming the income is there, is that it takes a very high down payment to put one of these together – usually 40% or so – and not everyone has that much money available. But they are fun loans, and we are one of the few lenders around who will entertain them. 

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5. Bridge loans

Drawing cash from alternative sources for downpayment

A bridge loan is one that a client uses to provide down payment funds for a new purchase. There are a few common ways to bridge into a new home, and I thought it might be worth reviewing. 

First, what most people are thinking of is a loan against the property they currently own. They draw on the equity they already have, buy the new place, and sell the old one after moving. Here, the main concern is that the client has to have enough income to carry three loans (the original loan on the old home, the new loan on the new home, and the bridge loan on the old home). They also have to have enough equity in their current place.

Next, they can borrow against another asset. Some investment banks allow clients to borrow against securities, some 401k plans allow for loans, they may have an equity line on an investment property, etc. These can be efficient ways to come up with money…though, of course, the client has to have quite a bit of money for this to be an option. 

And finally, the client may turn to a family for assistance in the form of gifts (or, if income is the issue, perhaps from cosigning). Here, it is mostly a question of whether the funds are available.

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Gift money

I was talking with an agent this week about gift money, and they didn’t know what I was talking about when I talked about a gift letter. This is just what the person giving the gift signs, basically to say that the money is a gift and not a loan. It’s a pretty standard piece of a lot of transactions, especially now when people are drawing on family money to bid up prices.

Acceptable gift donors are basically people related to the borrower. 

Here are Fannie’s guidelines:

  • A relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or

  • A fiancé, fiancée, or domestic partner

  • The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.

And here are Freddie’s:

  • The Borrower's spouse, child or dependent

  • An individual related to the Borrower by blood, marriage or adoption

  • A guardian of the Borrower

  • A person for whom the Borrower is a guardian

  • The Borrower's fiancée or fiancé

  • The Borrower's domestic partner

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Equity lines from other properties 

I am a big fan of being prepared – for both good and bad, sometimes situations pop up in life that require money. And one of the most flexible ways of being prepared is to have an equity line in place.

An equity line is just a revolving loan – think like a credit card, where you can borrow up to a limit, repay it, and borrow again – that is secured by the equity in someone’s home. Usually, they are second mortgages, meaning that they sit on top of a mortgage that’s already in place. And the borrower has a checkbook that they use to write checks that draw on the equity line, usually for a period of ten years.

The reason equity lines help people be prepared is that you only pay interest on the amount you owe. So if you are planning ahead, you would take out an equity line and leave it with no balance. This means you’re not paying interest, but you have the ability to tap the equity if an opportunity comes along. And this helps quite a bit when, for example, a clients wants to purchase an investment property. They can simply use the equity line to write a check for the down payment, and it makes it much easier for them to move quickly.

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6. Land loans

Tearing down and doing a new construction

If you have a client who wants to build their own home, they may ask you to help them find the land to build it on. And I hope you’ll think of me – I’d love to help them with the financing for the land and then later for the construction of the home itself. 

A land loan is set up with a three year term, and it’s interest only – basically, the idea is that the client is only carrying the land for a short time while working on plans and permitting, and the land loan will get taken out quickly by their construction loan. Down payment requirements are in the 35% range, and of course we love it if the client is putting even more money down. And then, we’re going to look for evidence that the land is buildable, usually by showing that the property has a permit for a waste disposal system.

From there, the process is actually quite straightforward – we do an appraisal just like on a regular home purchase, and can typically close on a normal residential purchase timeline. It’s worth noting that the appraisal will consider land value only – can’t give credit for a structure that’s being torn down! 

If you have a client who is interested, please have them give me a call. It usually takes a while for these transactions to come together, and I am always happy to have a conversation while they are still at the idea stage and figuring things out. 

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7. Financing residential properties that bring in income (e.g. Agricultural)

Somehow, thinking about turkeys got me thinking about farms. And thinking about farms got me thinking about how tricky it is to finance properties with agricultural influence with a residential mortgage. 

As a general rule, things get complicated once there is some other use on a property that brings in income – a horse boarding operation, for instance, or a maple sugaring operation. The reason this is difficult is that, in many ways, the value of the property is tied to the income that comes out of the business. And that drifts into commercial over residential territory.

This brings me around to things I can take a shot at, which are typically residences that have a little something else going on. The classic examples are horse properties. There are a lot of great borrowers who ride horses and buy properties that have facilities for them – I have financed many, but I’ve learned that they are all case by case. This is in large part because they are so unique – one will have a barn where the top floor is converted to an office space, and the next will have a barn that is falling down and possibly a hazard. So I do a writeup and have management review the specific property before bringing the file in – this way, I am on solid ground when I say that we can do it.

Another example is simply a property with a large amount of acreage. Here, I can close a residential loan, but we are typically not going to give value for what we’d call “excess land”. Ten acres will come up a lot here – basically, we get the property appraised as a residence and only give credit for ten acres. Ignoring the rest of the land means that the loan will typically work if it really is residential (because the buyer isn’t giving value for it either) but will probably run into difficulty if there really is a lot of value in the land.

If one of these pops up, the best thing I have to offer is a quick review. As with any case by case situation, the communication we have here and our ability to roll up our sleeves and figure a situation out in advance is a major plus. If I can help any of your buyers, please let me know. 

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Aaaand you’ve made it to the end! 🙌

Got a pressing question on loans? Why not contact me and I’ll point you to the right contact?

InvestingJoan BissdorfPortfolio Loans, Combo Loans, Asset Depletion Loans, Bridge Loans, Land LoansComment