Should I Refinance or Wait for Better Rates? How Coronavirus Is Impacting the Mortgage Market

Mindy:
Hello. Hello. Hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my comfortably mortgaged co-host Scott Trench.

Scott:
Oh, what an equitable introduction. Thank you Mindy.

Mindy:
Oh my God, Scott, that’s awful.

Scott:
When it comes to investments, really the minimum down payment for a conventional investment loan is 15%, a lot of people think it’s 20, but really just you need to understand that if you’re not doing a 20% down payment, you’re going to be paying mortgage insurance, which obviously could impact cashflow and could have other implications.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else and show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can live your best life.

Scott:
That’s right. Whether you want to retire early and travel the world, take out a mortgage or go on to make big time investments in assets like real estate, we’ll help you build a position capable of launching yourself towards those dreams.

Mindy:
This is episode 121 featuring Seth Jones from Movement Mortgage. Seth is joining us today to clear up some of the confusion about mortgages in general and the current mortgage situation specifically. We’re going to talk about mortgage forbearance and how that can affect you in the future. We’re also going to talk about refinancing, what qualifications lenders are looking for and how you can make the most of these low rates. Before we bring in Seth, let’s hear a note from today’s show sponsor.

Mindy:
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Mindy:
Okay, here’s thanks to the sponsor of today’s show. Seth Jones from Movement Mortgage, welcome to the BiggerPockets of Money Podcast. I’m super excited to have you here today because we are going to talk about mortgages and there’s a lot we have to unwrap. There’s a lot of things going on right now. We are recording this on Thursday before it releases, which is what? April 16th. It releases on Monday. Going to throw out a happy birthday, Anna, because today’s her birthday and we are having a snow day here in Colorado. So it’s kind of a less than ideal birthday today. 13 in quarantine. Anyway, okay Seth, let’s jump right in. If I am eligible for forbearance, I should just take it, right? It’s kind of a no brainer. I get three months off of paying my mortgage?

Seth:
So the short answer is no. Basically forbearance, the most important thing for people to understand is it’s not forgiveness. So this is something for people that really need help that have lost their income. Forbearance, there’s a lot of misconceptions out there and some people think that it’s tacked onto the end of the loan. Really forbearance can be handled in really one of three ways, but the most common way is that you are given a temporary reprieve from making your payment. However, once that is over, whether it’s three months, six months or a year, you are required to either pay it in full or set up a payment plan. So it could end up putting you farther behind the eight ball than you were to start with.

Seth:
Oh, and a couple other things real quick. If you’re going to need to connect with your servicer in regards to what forbearance is for you, so your servicer is who you’re making or mortgage payment to. And another great resource is the CFPB, which is the Consumer Financial Protection Bureau. cfpb.gov is a great resource to learn a little bit more about forbearance.

Scott:
For me personally, I am still paying my mortgages and I intend to continue paying those mortgages. I have a reserve set aside for exactly this purpose and I’m receiving most of my rent. There’s no reason for me to apply for forbearance. I don’t get any advantage from it. I have to pay it back later. I assume more risk and it’s my understanding that maybe it doesn’t affect your credit per se, but it does show up on your credit report and it is something that will be a part of your history, so to speak, on this Seth. Is that right Seth?

Seth:
Yes, absolutely. I’m glad that you brought that up because a lot of people aren’t aware of that right now, anytime your credit’s polled, you’re going to see that the mortgage was in forbearance and that there were payments missed. If you’re a real estate investor or you’re planning on buying another real estate investment or your primary residence the next year, then you’re really putting yourself at risk of not being able to qualify. Right now, lenders look at forbearance as delinquency. Even though it’s technically not of delinquency, it’s technically not supposed to show up on your credit as a delinquency. Lenders view it as that, so if you file for forbearance, just plan on not buying another real estate investment within one year if you plan on using conventional financing or some other traditional mortgage.

Scott:
Yes, not a good idea to apply for forbearance, unless you really need it, right? And I don’t know this, but I would surmise that, look, if you’re one of the people who make it through this without applying for any forbearance whatsoever, somehow, some way, some lender, some day, what a poem I’m constructing here, is going to look back on that and there’s going to be a longterm advantage from that, right? You don’t want to be the guy who needed assistance one month into this whole thing if you’re looking for longterm financing advantages and good relationships with lenders, is that at all true, Seth?

Seth:
Yeah, especially over the past two years. When a lender is looking at what’s happened recently, they’re looking at the past two years and payment history is something that’s looked at very closely. Mortgage rates are looked at very closely, so if you want to get the best possible terms, make your payments on time and don’t file for forbearance.

Scott:
Credit is everything for us. Real estate investors enter recessionary environment when potentially there’s buying opportunities. If you think that’s the case at all, make your payments people. Right?

Seth:
Absolutely.

Mindy:
Yeah. Well, and before we move on to the next topic, I want to note that there’s probably going to be some deals out there in the next six to 12 months. I am not a mortgage lender, but I would assume or surmise, as Scott so cleverly used. I would surmise that if I am actively in forbearance, there is no way I’m getting a mortgage.

Seth:
Yeah, there’s certainly no way that you’re getting a mortgage if you’re actively in forbearance. And then one other thing, and this is really my concern, is if people are in forbearance and then their servicer does not set up a payment plan or asset to be due, as the entire payment to be paid in full, a lot of people are going to be putting themselves at risk of foreclosure. So there’s a lot of risks here, a lot of things that you want to avoid it if you can.

Mindy:
Yeah, yeah. I’m really hoping that lenders have learned from 2008 and don’t just instantly start foreclosing on properties. We’re all in this together and you really have to try to make your mortgage payments. And I get, if the whole roof collapses, but if you don’t need it, we’re really talking to the people who don’t need the forbearance right now. Don’t take it as a precautionary measure. Now, you made an interesting point. So let’s say I have a $1,000 mortgage payment due in May and I can’t make it. So I get forbearance in May and June and July. That’s $3,000 that I didn’t pay. You’re saying that some mortgage servicers will say, okay, now it’s all doing August $3,000 is doing August. Can you negotiate that with your servicer or does the servicer really have the power here to say, “Hey, it’s due then, sorry.”

Seth:
So the bottom line is the servicers want to work and they don’t. You made a great point. They don’t want to foreclose, especially in this environment, and I’m sure the government’s going to be putting out additional guidance on that, but with that being said, you’re going to connect with your servicer and you’re going to figure this plan out before you fall behind. If you’re in forbearance, you need to sort this out first, figure out how it’s going to be handled by your servicer before you do anything. Otherwise, you’re not in forbearance, you’re just delinquent on your mortgage.

Mindy:
That is a really good point. If you don’t set up forbearance with your mortgage servicer, you’re just delinquent, which is even worse on your credit score than just being in forbearance.

Scott:
I love this. Is there anything else we should know about forbearance before we move on to one of my burning questions for you Seth?

Seth:
No, no, I think we covered it.

Scott:
All right. I think the question that’s on a lot of investors mind, assuming you’re not coming into a liquidity crunch, of course, is now a good time to refinance? Should I take a property that I’ve got some equity in it? Should I cash out refinance at a lower interest rate? If I can pull out 50 grand and have the same payment, I have the same exact risk profile I have today with $50,000 more cash from that after that refinance. Should I consider doing a home equity line of credit and what are the timelines with those types of things? Can you give us a little walkthrough about how an investor should be thinking through those types of questions?

Seth:
Absolutely. And the way that you just laid it out, if you’re an investor and you have that opportunity, then that could potentially make a lot of sense, but it’s really about what is your personal position and what are your goals. Too many people right now hear that interest rates are near all time lows, which by the way it really depends on the type of mortgage you’re pursuing because a lot of lenders are tightening up and some lenders are intentionally pricing themselves out of the market. Bottom line there is you want to shop around a little bit more now than you typically would, but when it comes to figuring out whether or not a refinance is right for you, you really want to think, okay, are you looking to just pay less interest? Are you looking to improve your cashflow or are you looking to pull cash out?

Seth:
If you’re looking to reduce your interest, then you have a math problem that you need to sort out and basically is what are the closing costs for the refinance and let’s say just hypothetically those closing costs are $5,000 to refinance that property. How much are you then saving an interest? But practically how much are you saving per month on your mortgage payment? If there’s a $100 difference there from your existing mortgage payment to your new mortgage payment, then you just divide the total cost by your savings per month and that’ll tell you how long it’s going to take to recoup that equity loss. And just to clarify your equity loss, generally that’s just going to be stripped out of your property. You’re not coming up with that out of pocket, but if you do go to sell the property, you’re going to have $5,000 less equity coming to you.

Seth:
So make sure that if you are going to be pursuing a rate and term refinance, that you’re going to be holding onto the property longer than it’s going to take you to recoup. And if it’s even close, if you’re thinking, well, this is a property that I’m planning on holding for three years or this is a temporary solution for me and I’m going to have an exit strategy, then you really need to look closely at whether or not you should be doing a rate and term refinance because in most cases a rate and term refinance is not the right solution. There’s another thing that a lot of people don’t think about and that is where are you in your amortization schedule? And when I say that, that’s just how far are you along in your mortgage? Because when you’re starting a mortgage, especially if it’s a 30 year mortgage, you’re starting by paying primarily interest and each payment you actually pay a little bit more principal over time.

Seth:
So if you’re 10 years into your existing mortgage and you go to do a rate and term refinance, not only are you losing equity, I mean you may be able to reduce your payment, but you’re starting over on a 30 year term and now the amount that is being paid towards principal, it’s going to be greatly reduced.

Scott:
So moving on, just real quick from an interest rate and rate and term refinance. Obviously if you have a good solid plan for pulling funds out right now, there’s a lot of good reasons to do that, especially if you’re trying to buffer your reserves or if you have an investment strategy that you’re trying to implement. But again, that all comes down to the numbers and how solid your plan is.

Seth:
Really, I think that is the majority of the reasons why you would want to do it unless you’re looking into debt consolidation, which right now that could be really important if you are pinched, if maybe you have an income reduction or a spouse has lost their job and you have a lot of other debt, that could be a solution that would improve your cash flow, potentially save you from putting yourself in a position where you’re beginning to become delinquent or fall behind on your bills. But that is a last resort and there are other problems if you’re looking into that.

Scott:
Yeah. Just to kind of give maybe some of the listeners a perspective into kind of how I think about it as an investor, I’ve got several properties. And some of them, I’m only four or five years into the loan term of one of those properties. This is the property in my duplex, I purchased back in 2014. But because of appreciation, I’ve probably got 50% equity, 50% debt versus the asset value of that property. And that’s it. That’s luck. Market appreciation and I did add a little bit of value to it.

Scott:
But my question for myself that I’m asking here is, should I pull some cash out and get back up to 75% LTV or 80% LTV, pull out 50 to a hundred thousand dollars and sit on that as an opportunity fund or invest that elsewhere? That’s a decision I have to make a normal times, right? Because it’s all about this concept of getting a little mathematically, maybe too deep here, but there’s a concept called return on equity. And as ID leverage, I get less of a leverage multiplier and appreciation a longterm against my properties.

Scott:
And the way I look at it is, Hey, I feel like I’ve got a stable cash flow right now, but I could potentially boost my longterm return on equity, by cash out refinancing, and still have a fairly low financing costs, which allows me to cash flow. And so those are some of the types of things that I’m thinking about as an investor personally. Now let me ask you this, Seth. What’s the market look like from a refinancing perspective? You just described I have to go shopping around a lot. Is it going to be difficult for me to go and find a mortgage broker rates? What’s happening with mortgage rates and how do I make sure that I get the best financing I possibly can if that’s my goal?

Seth:
So the bottom line right now is that it’s very cheap for lenders to borrow money. And I don’t want to get too deep into that. But with that being said, lenders right now, and there’s a full spectrum, I mean there’s news about what happened with JPMorgan Chase and how much they tightened up their guidelines for lending on mortgages, minimum credit score of 700, minimum down payment of 20%. Now, that is not going to be the way that most lenders handle that, but every type of lender is going to have a different risk profile and they’re going to look at how they’re going to lend money a little bit differently and it’s based off of their personal financial position.

Seth:
If a lender is servicing mortgages, meaning that they are holding on to the mortgage and collecting payments for the mortgage, they have a lot more risk exposure because of the forbearance issue. So what that means really is that they are probably going to get tighter than some other types of lenders. But the easy way think about this is that if you’re going to be looking for mortgages, there’s just a lot of volatility. There’s a lot of different responses and you want to get opinions from, I would recommend a mortgage broker, probably a direct lender and perhaps a bank just to see the way that they’re responding because typically lenders are pretty competitive. Three months ago, everybody was competing for the same buyers. Right now that’s not necessarily the case. Some lenders do not want to take on more business and some lenders are looking to increase their market share.

Mindy:
I thought it was interesting a couple of minutes ago. You said some lenders have purposely priced themselves out of the market. That sounds a lot like a contractor when you go and you get all these quotes and somebody has 5,000 and somebody 7,000 and somebody 20,000 you’re like, “Why would he charge 20,000?” Well, if you’ll pay it, he’ll do it. So with these lenders, if that’s the only quote you can get is a 9% mortgage, well maybe that’s what you’re going to get. Or you know, whatever, I don’t know how they’re pricing themselves out.

Mindy:
I actually just refinanced on Friday. I signed all the papers and I got the check yesterday to fund the refinance. I bought this house that I’m sitting in right now for cash. It was a really gross house. It was the guy selling it needed to sell it. He needed to in a hurry and cash was the most attractive thing to him. So I was able to get a discount on the price and then I had to wait six months to refinance the property to pull out the cash. But yeah, the market at one point it was like his rates were changing every hour and it was really, really crazy. It seems that things have kind of settled down a little bit. I really like your comment about shopping around. Can you address the whole shopping around and a hard pull on your credit score and that sort of thing because that’s a misconception that I see a lot of people still not realizing that those rules have changed a little bit.

Seth:
Yes, and you can easily source this again on cfpb.gov but really if you’re looking to shop around from your initial credit pool, so from the time that you’re pulling your credit specifically for a mortgage, not for something else, you have 45 days from that point to get quotes from other lenders or have your credit pulled from other lenders and it will count as one inquiry against your credit score. You’re still going to see those inquiries show up on your credit report, but they’re not counting against your credit score.

Mindy:
Okay. Let’s say I get my credit pulled. What sort of ding is that to my credit?

Seth:
That is a great question. It’s tough to answer because it really depends on how well established your credit history is. If you’re a first time home buyer and you have three lines of credit and a limited credit history, it’s going to make a bigger difference than if you have a well established credit history. But the bottom line is there’s six major credit factors. Credit Karma is a great resource just to introduce you to what those factors are, regardless of whether or not those scores are entirely accurate, but it is the least weighted of those six credit factors. So bottom line is it’s not going to make a huge impact on your credit score and especially if you have well established credit.

Scott:
I think the big question for me that I’m really trying to get around here is, is I talked to a lender a few weeks ago and said, “Hey, should I refinance when the fed lowered their rates?” And basically the answer I got was, “Hey, everybody is trying to refinance right now, and mortgage brokers simply can’t handle all of the excess business.” So to your point, some mortgage brokers are trying to get out of the market unless someone’s going to pay them a silly price like JPMorgan. I don’t know if they’d do it to a silly price, but they’re certainly limiting their price guidance. Somebody might say, “Yeah, sure I’ll origin a mortgage at a huge percentage point spread versus what you can actually get on the open market. Just because I have so much business right now that I can charge that.”

Scott:
And what we’re seeing there, in my estimation, is this shift from a buyer’s market to a seller’s market in the debt industry. Previously all these brokers were competing very heavily for my business as an investor, as someone who wants a conventional mortgage, and now overnight, because the lower rates and all the uncertainty, everybody wants a mortgage and the sellers of mortgages, mortgage brokers, have more business than they can handle. So the burning question I have is if I wait a few more weeks or a few more months, do I have a good shot at getting lower rates on my refinance or should I just go ahead and do it now? And if I shop around, I should be able to find what will likely be as competitive rate as I’m likely to see in the next couple of months. How’s that for a question?

Seth:
That’s an awesome question Scott. And that’s really hard to answer cause there’s a lot of speculation there, but I’m going to do my best. Really in terms of the rates, there’s a lot of variables that are going to determine where the rates themselves go and for anybody that’s in the market and they want to know whether or not they’re getting a competitive rate. One resource that I highly recommend is Mortgage News Daily. They have a daily rate survey that surveys a bunch of different lenders and puts together sort of an average rate for that day. So just a great resource if you’re trying to figure out if what you’re getting is competitive.

Seth:
But going back to your question, should you wait or should you look into it right now? I would recommend looking into it right now and being prepared right now because we don’t know what’s going to happen, but if it doesn’t make sense for you financially to pull the trigger today based off of the terms that you’re getting or the feedback that you’re getting even because as you both have alluded to, depending on the lender, the timelines for these processes can be extended. If it doesn’t make sense based off what you’re hearing, I think that there is a lot of reason why it could make sense to potentially wait and see, but you are running the risk by waiting that the dynamics of the market are going to change in a way that we couldn’t foresee just like they did when all of this started, that the great rates, historically low rates that we’re currently dealing with right now will pass by.

Scott:
Okay. I’m sitting in a relatively strong position, where this refinance would only help me by either buffering up my cash position or lowering my payment or a mixture of both. So it’s not necessary for me either way. It makes sense right now at current rates to do that. In some ways I want to beef up my cash position. It makes more sense, the lower the rate is obviously because then I can pull out either more cash and maintain the same level of cash flow or I can reduce my total financing cash outlay on a monthly basis by a greater degree. So in the context of that, what do you think? Since it makes sense now maybe it makes more sense later and I don’t want to have to close on two loans.

Seth:
You’re absolutely right, but if it makes sense now, I don’t think that you should wait and see. I think that’s a lot like trying to time the market. And I think that’s a good way to think about it. So if it makes sense now, you may want to really dig into it and see if there’s an option out there for you. And just to put it in context, the beginning of March, March 10th, we hit the lowest rates that we’ve ever seen and we are near within a quarter percent depending on the lender because some lenders as we mentioned are pricing themselves out just on a conventional … And I’m not trying to jump around here, but conventional pricing is better than other types of pricing right now just because of the risk profile and the general buyer profile associated with conventional financing. But if you’re in that market, I think that you should look at all your options, perhaps do some shopping and if you find something that really works for you and the numbers work, don’t hesitate to pull the trigger.

Scott:
Great, great advice.

Mindy:
That’s really great advice. I am going to give a little bit of real life example here. We were locked in at a rate for, I want to say 3.875, it’s an awesome rate, but for our owner occupied property, it’s another investment property. So we were locked in there, but the lock didn’t last until the time that we had to close because we had six months and it was like just shy, whatever. So all this stuff came down and we decided we’re going to just break our lock. With the lender, we couldn’t lock in again for another 30 days. So we were waiting around to see what would happen. The rates at one point went up and we’re like, “Man, that was a bad choice.” And then they went down for another day and we’re like, “Oh that would be a really great choice, but we can’t lock in yet.”

Mindy:
So we continued to talk with our lender and he was quoting these rates and then like they would just change all the time. And finally we said, “Okay, we want to be locked in at 3.5.” So as soon as it hits 3.5 lock us in. And he was able to do it in the next couple of days I think. And we locked in, we closed. And that’s a great rate. If rates go down to 3.25 that’s a better rate, but over the course of 30 years, what’s a quarter point going to cost me? At such low rates, it’s really not going to cost that much.

Seth:
Yeah, and I’ll actually link to an amortization calculator. I’ll share that in the show notes so that people can actually do the math on that. But I think you make a great point, Mindy, that’s something that I hadn’t necessarily thought about before. If people are in the market right now, they should do the math on what would be a total win for them, just like you did at the 3.5 and if you have a preferred mortgage lender, let’s say you’ve interviewed three mortgage lenders and you got the best pricing with one, they had great customer service, whatever. I would let them know, here’s what a total win for me is. Let me know when it looks like we can do that.

Mindy:
Yeah, that’s a great point. And yeah, I have used this guy, this is now my eighth time using him. Sorry, you don’t lend in Colorado or I would’ve called you Seth.

Seth:
Well, Hey, I appreciate it.

Scott:
All right. We’ve talked about don’t get forbearance if you don’t need it and we’ve talked about some of the things to think through around refinancing, which I think was a great discussion. What if I’m considering getting a new mortgage? Aside from the rates question that we were talking about, where is the market going to get a little lower or higher rates down streams that make sense now or later? Can you walk us through how a first time home buyer, first time real estate investor should be thinking about their first mortgage, we know what we’re seeing credit tightening, maybe a little bit higher down payments potentially. What other things should we be thinking about? Loss of income or whether the rental future rental income will count those as loans. How should a new investor home buyer think about that first time mortgage?

Seth:
Great question. I think there’s a lot to cover there. Just one quick example of how this current situation is impacting people. I actually just before this call, got off the phone with somebody who found out yesterday that they are having a 20% reduction in income. Unfortunately, this had a huge impact on their ability to qualify and because lenders are aware of everything that’s going on in the market. The first thing is you need to understand how stable your employment is and understand the likelihood of a change in that employment happening, especially if that income from that employment is required to move forward on your financing. Because right now more than ever, lenders are verifying prior to closing, the day before closing, five days before, 48 hours before and a day before just to make sure your employment has not changed so they feel confident doing that loan.

Seth:
So that’s one thing to think about, make sure that the income that’s being used is stable and that you don’t see any major changes happening. Otherwise you’ll get the whole way through the process. You’ll have some cash outlays and then you may be faced with something that prevents you from moving forward.

Seth:
But going to somebody who is thinking about getting into the market, there’s really two segments because there are the people that are sort of on the fringe of qualifying. Right now, they’re going to have a harder time than they’ve ever had before. People were working to get up to a 620 credit score, a 640 credit score, and they were trying to get a little bit safe for that three and a half percent down payment. Now those people that were working on their credit, maybe they were at a 580 and they needed to do to get to a 620 just to make sure that they can take advantage of a low down payment program. Those people in many cases are going to be pulled back from. And if you were working on that, it makes sense to talk to your lender that you were talking to make sure that you’re aware of whatever changes may have happened and how that impacts your ability to qualify.

Seth:
But if you have great credit and you’ve been working towards this for a long time, right now is really an opportunity to make sure that you’re getting a great deal to take a look at a couple of different lenders because conventional financing, again, is really offering exceptional rates and you can still do low down payment options. They are out there. You can do 3% down with a conventional loan with a home ready or home possible loan. There are income restrictions with that depending on your location, but that is an option that’s out there and you can do 5% down. Bottom line is if you have great credit or if you have the ability to improve your credit to a position where you are 700 or greater, you’re going to have a unique opportunity to take advantage of some great rates.

Scott:
Let me ask you this. I’m a first time rental property investor buying a duplex. And I have a good job and I close on that duplex in the next 30 days, but a great duplex cash flowing deal and then I lose my job right after we closed, week after we closed. Am I in better or worse position in your opinion than if I’d waited to buy that duplex or equivalent duplex and lost my job in the middle of that closing process?

Seth:
So it depends on whether or not that was a great investment because-

Scott:
Let’s assume it was a great investment.

Seth:
Okay. So if it’s a great investment, you definitely want to lose your job afterwards because nothing’s going to happen and you’re going to end up having the cashflow from that property. So after you close, you can lose your job. As long as you’re making your mortgage payments, the lender doesn’t care. But if you lose your job in the middle of the process before you close on that property, really you’re going to have to wait until you regain employment. And then you have the whole situation of explaining that gap, getting the appropriate amount of time in that new job where depending if it’s the same career field or if it’s a different career field, you may need just one month of pay stubs or you may need six months because it’s a totally different career. I hope that answers your question.

Scott:
No, I love it. And I asked, it was a leading question. But I want to point out, Hey, there’s an uncertainty right now. Do I buy, do I wait? Do I see what happens? All of that is very real, but there’s risk on buying now and the market collapsing. And there’s risk that the market doesn’t really drop by a much or stays flat or even goes up over time on average over the next couple of years. And your ability to purchase is significantly delayed because your paycheck is cut, because your employer is forced to do that or you’re laid off and you have to get a change careers or make a different change. And so all of those risks are need to be factored in here. And I think that’s an interesting one that you bring up in terms of whether your income gets cut in during the closing process or before you’re looking to buy here. The short to medium term.

Seth:
Absolutely. And just a quick followup on that. If you’re self employed, you’re not going to likely lose your job. You’re more likely to lose income. So if you have a really strong income history over the past two years leading up to this crash, generally lenders are going to look for your most recent two years tax returns and they’re also going to look for a year to day profit and loss. If you’re in a strong position right now based on those numbers and maybe this hasn’t dramatically impacted your business at the moment and you were on the fence of whether or not you should do something and you foresee potential loss in income, you may want to act now because as soon as lenders can document that income declining and it’s a greater than 20% decline, you’re going to have a much harder time getting a mortgage.

Mindy:
Yeah, I think what gets lost in some mortgage conversations is I already know that so I’m not asking that so I want to plug the show notes for today’s episode which can be found at biggerpockets.com/moneyshow121 we’re going to clarify some of these terms that Scott and Seth are throwing out. I also want to clarify, you said something about cash outlays and that is a very mortgage broker term, but that might not be understood by some people who are listening who aren’t constantly getting mortgages. That means a fee that you have paid as the borrower that you don’t get to recoup. So let’s say you lost your job halfway through. You’ve paid for your appraisal, you’ve paid for all these little things. You’re paying that and you don’t get that back. Your lender is not going to cut you a check for the $400 or $800 or whatever. So you don’t get a guarantee on funding until when? I was going to say until close, but I guess that’s maybe not true.

Scott:
Well, yeah, it actually depends on whether it’s a purchase or a refinance because on a refinance you have a three day right of rescission. I’m glad you brought that up. Funding doesn’t occur on a refinance until after your three day right of rescission expires.

Mindy:
Which means I can say, “Oh, I changed my mind. Nevermind. I still pay all those fees. I still have all those cash outlays.

Seth:
Yes. So bottom line is the lenders still monitoring your situation and you also have the ability to change your mind on a refinance. But on a purchase it would be the day of closing.

Mindy:
Yes. So let’s say that I am closing on Tuesday and I lost my job on Monday. You can as the lender, if you discover that I have lost my job, you can pull funding even though closing is Tuesday?

Seth:
That’s correct.

Mindy:
Okay. So I just think that’s really important to say to people who don’t always get mortgages all the time for no reason. Well, I guess because they’re buying all the time. Not for no reason.

Scott:
All right, hope you’re enjoying the show. We’ll be right back after a word from today’s show’s sponsor.

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Scott:
Moving on to another kind of area of this. Are there any barriers you’re seeing to closing loans besides income disruption or credit problems? Like, “Hey, my income just dried up because I got laid off. Now I can’t close this loan.” That makes perfect sense, but are there things like are you seeing appraisers can’t go to properties, inspections can’t take place, notaries can’t show up for loan closing documents or other types of situations like that?

Seth:
So personally I’ve been very fortunate to not deal with a lot of that firsthand, but I have interacted with a lot of people in the lending space that have dealt with some of those issues. And some of this is location dependent, so at some locations are impacted more than others. But basically there are a few things, specifically what you mentioned, Scott, appraisers and title companies that are having a lot of hardship or I should I say a lot of difficulties in navigating some things that are normally very simple.

Seth:
So appraisers have to go to a property, they show up to a property, they inspect the property, and then they provide a report. Right now, a lot of appraisers are just opting to remove themselves from the process. They’re saying during this pandemic we’re not going to participate in providing appraisals. Well, we’re in the middle of a refinance boom and people are still purchasing properties. So that means that there’s far fewer appraisers available in the market to perform appraisals. And I have seen situations where appraisers decide they no longer want to pursue an appraisal and this can lead to time delays and perhaps significant time delays. And in some cases, and Mindy, you mentioned a rate lock earlier, we’ll probably have to explain that a little bit more in the show notes. But bottom line is for a rate lock, you have a specific rate for a certain period of time and after that time expires you’re either going to be paying more to extend that rate or you’re no longer going to be eligible for that rate.

Scott:
So when these time delays, like from appraisals come up, they can impact other parts of the process. But title companies, the last closing that I attended, they were wearing masks. Some title companies are not doing in person closings, some are trying to navigate closings virtually, but there’s a lot of red tape there that needs to be cut through. So that’s very difficult.

Seth:
And then the only other thing that I would point out is there are what I call third party verifications, which we were talking about the verification of employment earlier. And just a quick explanation of this. Someone behind the scenes with the lender, is going to be verifying that you’re still working where you work. And this is normally something that the borrowers never really pay attention to. It never really comes up. But when everyone is working from home and people are not at their normal workstations, these simple tasks contend to … They can become issues because maybe that big company is not responding to those HR emails the way they used to. Or maybe the fax number was the primary way they gave that information that’s no longer working. Bottom line is there’s a lot of obstacles or potential for delays and those potential for delays can put you in a position where you could potentially lose the opportunity to follow through on that financing or that deal.

Mindy:
Yeah, and just like the mortgage rates are so volatile right now and they’re going up and down and when you lock in, a rate that means this is your rate and it’s guaranteed they can’t charge you anything else. It’s guaranteed for what? 30 days, 45 days, whatever you decide to lock it in at. So if rates go up, you don’t get that, your rate doesn’t go up, you stay in that same rate. So you’ll have to, like you said you might have to extend the rate lock, which costs you money, which is another cash outlay.

Seth:
Absolutely.

Scott:
Well, the other question I have is, are you seeing any lenders increasing their closing costs? We could talk about rates, but besides the rate, is there anything I should be looking out for on closing costs and closing documents that might be priced higher, snuck in there that I should be looking out for?

Seth:
I’m really glad that you brought that up Scott, because points are something that are really not understood by a lot of people that are just starting to understand the way that mortgages work. But points are directly tied to rate. So they are directly connected. So if there are points on a mortgage, that is directly tied to your rate. So bottom line is yes, to answer your question, a lot of lenders, and this is the same idea of pricing themselves out, many lenders are pricing themselves out with additional expense. So if the mortgage was 4%, maybe it’s now 4% with a point. And just to define what a point is, a point is 1% of your loan amount.

Seth:
So if you hear that term point and you have a $200,000 loan that is $2,000 in additional closing costs. You also can have irregular points, meaning it’s not just one point or two points or et cetera, you can have 1.5 points or any range from zero to in theory, you know 10. But yeah, many lenders are charging more and it is directly tied. So I mean some people are charging more in the rate, some are charging more with points. I hope that answers the question. I can clean that up a little bit if you’d like.

Scott:
No. I’m going to get a card from my lender and it’s going to show me my closing costs. It’s going to show me things like appraisal, those types of things and my points, any lender fees, the rate, all that kind of stuff. What you’re saying is basically you’ll be able to spot the lender fees pretty easily and they’ll just be much higher than … And those lender fees by law have to get tied into my APR, APY, right?

Seth:
Correct. Yes. APR. There’s really five different categories of fees. I’m glad that you brought this up because a lot of people don’t understand this, and I’m just going to cover this real quick, but when you’re buying a home, you’re going to be paying taxes, you’re going to be paying insurance, you’re going to either be paying a title company or an attorney to close, and then you’re going to have your inspections. And then you have what are called your lender fees.

Seth:
Now, everything but lender fees, the lender has nothing to do with. So when you’re getting a loan estimate, it’s important to understand that if you’re getting side-by-side loan estimates and you’re looking at them, pretty much, if for competitive purposes, disregard everything but the lender fees and the rate because those other fees are going to turn out to be the same. The lender doesn’t control the title company, the lender doesn’t control the inspectors, the lender doesn’t control taxes and insurance, so make sure you’re comparing apples to apples and looking at those costs. But if you’re looking at a formal loan estimate, it’ll actually be in Section A and it’ll say origination charges and that is where the lender fees will be located and you should be able to spot them right away.

Scott:
Yeah. And the simplest mechanism to compare all these things is just your API, right? Which combines both the lender fees and your interest rate. Right?

Seth:
Correct.

Scott:
Perfect. Is there anything that as an individual I can do if I’m going to refinance or buy a property right now from a paperwork organizational perspective, they have the right number for my employer with all this kind of stuff. For example, as you mentioned so that they could verify my income. Is there like a checklist or something that we can be thinking of to set ourselves up to have the smoothest possible process here?

Seth:
Yes. I actually have a checklist that I’ll share and you guys can put it in the show notes, but the main thing is are you W-2 or are you self-employed? Because they’re going to be completely different processes and if you’re retired and you got social security income or you’re getting your pension, that’s great. That’s much simpler. But if you’re a W-2 employee, basically you just have to make sure that you know who your HR representative is, that would be responsible for handling this and make sure that you have an open line of communication with them so that they know you’re going through this process and they know that you’re going to need them to be interacting with the lender or yourself at some point.

Scott:
Got it.

Mindy:
I can just imagine how many calls, Alex, fields every month. The people in our office are investors, it seems like when you started BiggerPockets, all of a sudden you want to buy a house. There’s one guy that does most of the loans. There’s one guy that does the most of the real estate agent work there and it’s really funny though to watch all these people. “Oh, I’m having my inspection today. I’m closing today.” Poor Alex. Let’s see. I wanted to touch on financing a primary home and a secondary home and an investment home and how this can be different.

Seth:
Yes. So basically primary residences are going to get the most attractive financing options. They’re perceived to be lowest risk by lenders. So with primary residence financing you’re going to be getting lower down payments, generally speaking, and lower rates. With a secondary residence, one thing that I think a lot of people aren’t really aware of secondary residence mortgages are how they work. But a conventional loan with a secondary residence you can do at 10% down conventional loan with very competitive rates. And the requirement for a secondary residence is that you live in it for part of the year. That’s your intention.

Seth:
So a lot of Airbnb investors are people that utilize vacation rentals in some way in their investment strategy. That is sort of an ideal mortgage option if you do intend occupy the property for part of the year. When it comes to investments, really the minimum down payment for a conventional investment loan is 15%. A lot of people think it’s 20, but really just you need to understand that if you’re not doing a 20% down payment, you’re going to be paying mortgage insurance, which obviously could impact cash flow and could have other implications.

Scott:
I got one here, let’s say that I live in house hacking. And I’ve done that for a year or two and I want to refinance right now. If I refinanced using a primary residents’ mortgage. Like, “Hey, this is my primary residence.” Do I have to stay there for another 12 months or can I immediately then move out and buy another primary with the conventional mortgage? I know if you buy a property using conventional mortgage as a primary, you have to stay there for 12 months or intend to. Is that the same rule for a refinance?

Seth:
And you just said it exactly right. You have to stay there for 12 months or you have to intend to, and there’s a lot of gray area there. I don’t want to really muddy the water, but yes, you do have to intend to stay in that property for 12 months. Obviously things can change and if things change then that’s its own set of circumstances, but you have to intend to live there for 12 months.

Scott:
That’s right. So people, in other words, if you are living in a house hack duplex or a house hack in general and you refinance at the primary mortgage and you intend to buy another property right away, you are committing mortgage fraud.

Mindy:
Which is a felony.

Scott:
Yeah.

Mindy:
Seth said he didn’t want to muddy the waters. I sure want to muddy the waters because I totally understand where people are coming from and they’re like, “Oh well, it’s just a bank. What does it matter if I lied to the bank?” Well, it matters because it’s a felony and this is a felony punishable by up to five years in prison, not jail, prison. And if you don’t know the difference, prison is worse. I don’t personally know the difference. I just watched a lot of TV. But yeah, so this is one of those, “Oh, well, who does it hurt?” It’s a crime of no victims, but you’re the victim because you’re the one doing the five years in prison. I see this question so much, I want to just scream sometimes, but people will say, “Oh well, how are they going to find out?” Oh, you know what? I don’t care how they’re going to find out if they find out, I am now a felon forever. Plus I have to spend five years in prison.

Scott:
Is it difficult to get a mortgage after this? After you get convicted of mortgage fraud, Seth?.

Mindy:
That’s a great question. I’ve been fortunate enough not to deal with that too much, so I don’t know. But I assume it is.

Scott:
All right. And Mindy, I actually want to follow up one thing that you said there because you just gave the legal implications, but there’s also financial because in addition to everything you just mentioned, you’ll also be forced to refinance and that will have additional cost associated.

Mindy:
Yes. So if the prison term and the felon stamp isn’t enough, it’ll also cost you money. So yeah, thank you for clarifying that. I didn’t know you had to refinance. Let’s go back and talk about your word intent. When you buy a house with the intent of living there and two months later your boss is like, “Hey, we’re shipping you off to Hawaii.” Okay, yay for you. But also you intended to live there for 12 months. Your job circumstances changed your mind. That is what I believe to be an acceptable reason to be moving. And you still get to keep your primary residence mortgage if you want to keep the property, you don’t have to refinance that. And I believe you can go and buy a house in Hawaii with the primary residence mortgage as well.

Scott:
Right. And I want to clarify something. You said your job circumstance changed, but then you also said changed your mind. I think the real clarification is your job circumstance changed. Changing your mind, that can be where it gets a little dangerous, but when circumstances change, that’s normally whenever you are. The example of a change job, a career change, that’s a perfect example of when it’s okay.

Scott:
And the rules as I understand them are pretty reasonable. Like your mom gets sick and you need to move home and take care of her. Like that’s another example of something that I think is largely covered by this kind of stuff. Familial changes, job changes, those types of things. So it’s not like you have to be really worried if something comes up and you’re forced to move away or life circumstances change, you have to do that. But it’s just if you are trying to buy your next rental property and gaming the system with that, that’s where you get in trouble.

Seth:
Yeah. And the really easy way to think about it is if you feel 100% comfortable talking to an investigator and explaining your situation, you’re fine. If you are not, you’re doing the wrong thing.

Scott:
Fair enough. I like that.

Mindy:
That’s a good way to say it. Okay. And when I said change your mind, I meant changed your plans. You intended to stay here forever, but then your plans got changed when your job transferred you to Hawaii.

Scott:
Well, on this very late note of mortgage fraud and prisoner jail time, whatever. It seems like a pretty good, reasonable stop and put, unless Seth, do you have any other major topics that you think would be valuable for someone listening to this or trying to understand the current mortgage climate?

Seth:
I think we covered quite a bit and off the top of my head I don’t have anything that I think is pressing.

Scott:
Got it. Well, why don’t we move on to the famous four then? What do you think?

Seth:
Sounds great.

Mindy:
Okay. Seth, back by popular demand. It is time for the famous four questions. Are you ready?

Seth:
I’m ready.

Mindy:
What is your favorite finance book?

Seth:
This one is actually a really hard one to answer and I tried to get it down to one. I’m sorry, I have to give three JL Collins book: The Simple Path to Wealth. I think is a must read. Vicki Robbins, Your money or Your Life. I think is a must read and I’m not being paid to say this, but if you are a young professional and you are considering what books you should be reading and you have not read Set For Life, you absolutely have to read that book.

Scott:
I’m a big fan of that book too. Thank you.

Mindy:
Oh my goodness, Scott. Oh, I’m sorry Seth, who is the author of Set For Life?

Seth:
That would be Scott Trench.

Scott:
Well thank you very much for the plug. That’s very nice.

Mindy:
And I will say all three of those authors have been on our podcast.

Scott:
That’s right. Yeah. We’ll link to their episodes on the BP Money show in the show notes as well so you can listen. Listen to them before you read those books. All right. What was your biggest money mistake? Let’s hear your biggest money mistake and then let’s hear what you think the biggest mistake someone might make in the context of the current mortgage climate. Can we do both? Put you on the spot there?

Seth:
Yeah, absolutely. So my biggest money mistake was actually, it’s pretty pronounced and I was very fortunate the way that it turned out, but whenever I was in the military and I was trying to figure out investing, I really didn’t know what I was doing. I read quite a bit, but I read a mutual fund book and it gave me the advice that I really just needed to evaluate, and I can’t remember the book off the top of my head, but it mentioned how to evaluate mutual fund investments. And I ended up putting really all of my savings into a Precious Metals Mutual Fund without really understanding what I was doing.

Seth:
And I was very fortunate that I ended up selling once I realized that I did not know what I was doing, but that was a fund that ended up, that was right before 2008. And that mutual fund ended up going from $40 a share to, I believe it ended around $8 a share. Really yeah, that was definitely the biggest money mistake I’ve ever made.

Mindy:
So what did you buy it at and what did you sell it at?

Seth:
I was buying it, and this was the precious metals fund that USAA had for awhile, but I was buying it at around $23 a share. I actually sold it at $40 a share. So financially I ended up doing fairly well with this. But in retrospect, I’m appalled by the decision to do that because I had 90% of my net worth tied up in precious metals.

Mindy:
So this goes back to my favorite book, The Richest Man in Babylon, and he says, “Hey, invest in what you know. Invest your money with somebody who knows what they’re doing too.” So if you don’t know what you’re doing, the simple path to wealth will tell you to invest in index funds and that’s a really interesting and easy way to invest. I’m very glad you didn’t lose any money.

Scott:
And we get back to the point of precious metals do not generate cash flow. Precious metals, they’re not going to appreciate necessarily in value. They’re more of thought of by most people as a hedge against inflation. So it’s very difficult way to build longterm wealth, in my opinion. And I think the opinion of most people who study finance and investing over a long period of time, the way you make money is really by buying low, selling high and the fluctuations of value relative to a dollar or whatever currency you’re investing against. Right? And so-

Seth:
Yeah, absolutely.

Scott:
… you’re not going to cash flow a precious metal. Right?

Seth:
Right. I learned that later.

Scott:
All right. What about the second question? What’s the mistake someone can make while they’re looking for a mortgage in today’s environment?

Seth:
One that’s just fresh on my mind because I just dealt with this today is somebody opening up a credit card for all that new furniture that they want to fill their house with before closing. You definitely don’t want to open any new debt before you close on your home. You don’t want to get the car that matches the house. You don’t want to fill your house with furniture before you close. Those are things that you always do your best as a mortgage lender to prepare your clients for, but you just want to make sure that you’re not doing that.

Scott:
Every once in a while we get a post on the forums or BiggerPockets, “I just quit my job and now I’m going to go buy my first property.” And this reminds me a little bit of that. It’s like, “No, dude, you don’t quit your job right before you close your loan.”

Mindy:
Since we’re talking about mortgages, I am going to throw out there the whole mortgage wire fraud issue. We haven’t really talked about that. Basically your lender is going to require you to wire your funds for closing your down payment funds for closing and you do that to your title company or attorney and you go into the title company or attorney’s office. You physically walk in there and you say, “Can you give me a printout of your wire instructions?” You ask them, “Will these instructions ever change?” They will of course say no. It is a leading question, but will never change. So sometimes people’s emails get hacked. The mortgage lender, the title company, they will send you an email that says, “Oh my goodness, sorry, I gave you the wrong number.” Why are the funds to this number instead? It’s a fake email and your money will be stolen.

Scott:
One just follow up to that Mindy, I know a lot of title companies are also right now in addition to doing the wiring instructions in person, they’ll send them to you, but then they’ll also require you to verbally confirm them with somebody that you recognize from the process.

Mindy:
Oh, good. Good. Yes, I was going to add that too. Yes. Once you get the wire instructions, you double check them. And when you give them to your bank, you walk into the bank, you hand them to the banker and you say, “These are the wire instructions.” I mean you’re wiring 10, 20, 50, $100,000, I don’t want to lose a dollar. I certainly want to lose that much money. And when I’m a real estate agent and when I’m starting to work with somebody, I tell them this, I give them the whole spiel. I am never going to tell you that the wire instructions are wrong. That comes from the title company. Go in there physically, talk to them, et cetera. I wanted to say that because every once in a while I’ll see a post on Facebook, “Oh, I just lost my money.” And it just breaks my heart. Okay. On that happy note, what is your best piece of advice for people who are just starting out?

Seth:
I think that it would just be to get connected. I think that the BiggerPockets Money Facebook group is an awesome group to get started if you’re looking for advice. A lot of people talk about getting a mentor. There’s nothing better than biggerpockets.com or a Facebook group. It doesn’t have to be a particular one, but where you can crowd source feedback. You can ask a question and you’re going to get 20 different answers to your question and you can just eat the meat, spit out the bones.

Mindy:
Seth, I’ve never heard that phrase before. I love that. I think a lot of the comments that you get from people make you think, Oh, I didn’t think about it from that point of view. I didn’t think about it longterm. I didn’t think about it … Whatever the question is about. That’s a really great, eat the meat and spit out the bones.

Seth:
I can’t take credit for that. I heard that from Brian Buffini. But yes, basically take the good feedback. You’re going to get all kinds of feedback, but you don’t need to listen to it all of it.

Scott:
I love it. What is your favorite joke to tell at parties? And bonus if it’s mortgage related?

Seth:
I thought people would absolutely flock to my services whenever I told them that I offered 0% loans, but there was literally no interest.

Scott:
I love it. I love it.

Mindy:
I quit.

Scott:
I give you full credit for that one.

Mindy:
Okay Seth, where can people find more about you?

Seth:
People can find more about me on biggerpockets.com. I’m on the BiggerPockets Facebook group and my website is sethapprovesloans.com.

Mindy:
Oh, Seth approves loans. I like that. Seth, this has been fantastic. I’m super excited to have you and thank you so much for your time today to answer all these questions, because I think there’s just a lot of questions about the mortgage process in general and in this current weird climate, I think this is going to be very helpful to a lot of people.

Seth:
Thank you guys so much for having me. I’m humbled to be here.

Mindy:
Okay. We’ll talk to you soon and I’ll see you in the Facebook group.

Seth:
Absolutely.

Mindy:
Okay. That was Seth Jones with a mind blowing amount of mortgage information. I want to just point out that we are going to include links to all of these things that Seth shared. A lot of definitions to kind of make more sense in our show notes, which can be found at biggerpockets.com/moneyshow121. Scott, what did you think about today’s episode?

Scott:
Well, I really thought it was a first rate episode, Mindy. I really thought that he had a lot of good things to say about the current mortgage climate. I learned a lot. I thought it was a lot of fun, and really just action packed with information and tips and tricks. I am going to take action based on this podcast, on my own personal situation, and kind of begin the process of refinancing a couple of my properties.

Mindy:
Good. I think that having an idea of what mortgage rate you’re looking for is a good choice and can help you really take advantage of these amazing rates that we’re having. A couple more links I wanted to share is, BiggerPockets has a loans page. You can find that at biggerpockets.com/loans and we have a mortgage calculator and we will include links to all of those things in our show notes. I thought this was fabulous. It kind of took out a lot of the mystery of what is a lender looking for, what goes into the mortgage, what goes into your credit score, et cetera. It’s important in today’s current climate, but I also think that longterm, this is going to just be a really great episode for people to listen to when they’re thinking about getting a loan.

Scott:
Yeah. Just before we depart, I want to do a quick plea for help here. One of the things that Mindy and I love are reviews of this podcast. So if you’ve listened this far and you’re at the end here, one of the best ways you could help us back is, one join the Facebook group and ask us questions. We’re always happy to interact and do whatever we can to make the show better for you as a listener. But please leave us a review on iTunes and tell others what you think about the show and whether you enjoy it.

Mindy:
Yes, that would be wonderful. Thank you. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 121 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen and I don’t even have a cute little mortgage pun. We hope this was an interesting show. We hope you listened to this show with interest.

Scott:
This mortgage conversation is just really dying a-loan.

Mindy:
Oh, okay.

Scott:
Bye.

Mindy:
Bye. That was a terrible joke, as usual. I will see you next week.